State of electronic benefit transfer (EBT) : working paper

Stegman, M., Quinterno, J., and Lobenhofer, J. (June 2002). “The State of Electronic Benefit Transfer (EBT).”
Center for Community Capitalism: Chapel Hill, NC.
The State of Electronic Benefit Transfer (EBT)
June 2002
John Quinterno, Jennifer S. Lobenhofer, and Michael A. Stegman
Center for Community Capitalism
The University of North Carolina at Chapel Hill
Working paper
The State of EBT 2
Table of Contents
Overview 5
The History of EBT 5
National Trends 6
Benefits Delivered via EBT 7
Direct Deposit and EBT 7
The Mechanics of EBT 8
Benefit Type #1: Food Stamps 8
Benefit Type #2: Non-Food Stamp Benefits 8
How EBT Delivers Food Stamp Benefits 9
How EBT Works to Deliver Non-Food Stamp Benefits 10
On-Line versus Off-Line EBT 10
EBT’S Design, Procurement Models, and Vendors 10
Procurement Models 11
Pricing Model 12
Market Evolution and Actors 12
Financial Impacts on the Federal Government and the States 13
Impact #1: Administrative Cost Reductions 13
Impact #2: Impact on Fraud 15
Illegal Trafficking of Food Stamp Benefits 15
Other Forms of Food Stamp Fraud and Non-Food Stamp Fraud 16
Consumer Effects 16
Overall Consumer Satisfaction with EBT 17
Issue #1: Vendor Fees and Surcharges 18
Issue #2: Recipient Training 20
Issue #3: Customer Service 20
Issue #4: Technological Reliability 21
Issue #5: Consumer Protection 22
Issue #6: Interoperability: A Recipient’s Perspective 23
Issue #7: Privacy 24
Issue #8: Card Replacement 25
Issue #9: Access to Farmers’ Markets 25
Merchant Concerns 26
Concern #1: System Costs 26
Concern# 2: Government Reimbursements 29
Concern #3: Technological Reliability 29
Concern #4: Interoperability: A Merchant’s Perspective 30
The State of EBT 3
Concern #5: Cash Flow 30
Merchants and Banks 31
Expansion of EBT 31
National Expansion to WIC 31
State Program Expansion 32
Strengthening EBT’S Ability to Deter Fraud 33
Lessons Learned from the EBT Experience 34
The Short-Term Challenges 35
Coping with EBT’S Competitive Dynamic 36
Dealing with Cost Neutrality 37
Adapting to Changes in Pricing Structures 38
Choosing Between On-Line and Off-Line Technologies 39
Conclusion 40
Appendix A: List of Acronyms 41
The State of EBT 4
List of Exhibits
Table 1: EBT Development Timeline 6
Table 2: EBT Status by State 6
Table 3: Procurement Method by State 11
Table 4: Prime Contractor by State 13
Table 5: Status of Electronic WIC Initiatives 32
Table 6: Pending Contract Expirations 36
Graph 1: Five Most Common EBT Benefits 7
Graph 2: Number of Free ATM Transactions 18
Graph 3: Fees for Additional EBT Transactions 18
Figure 1: Sample EBT Cards–Dakotas, Maryland, and Indiana 9
The State of EBT 5
Overview
The labels on automated teller (ATM) and point of sale (POS) machines typically list the
payment networks that customers may use to access cash or purchase goods at the terminal.
Cirrus and Plus are among the more common networks, but in recent years another network logo,
QUEST, has also begun appearing at machines across the country. While QUEST resembles the
other networks, it differs in a key way: Instead of providing individuals with access to their bank
accounts, QUEST allows qualifying individuals to access welfare benefits like food stamps and
Temporary Aid to Needy Families (TANF).
QUEST is part of an electronic benefits transfer (EBT) system, which itself belongs to a broader
movement toward using technology to deliver governmental benefits in a more cost-effective
manner. In spite of its popularity and cost-saving potential, EBT’s national effects on diverse
stakeholders, such as the federal government, state governments, benefit recipients, and
merchants remain unclear due to a lack of scholarly attention. This working paper attempts to
advance public understanding by using survey data, media reports, and government documents to
tell the EBT story―a story that has grown more intricate than anticipated. Critical chapters
include the technology’s history, mechanics, procurement, national use, financial impacts,
consumer effects, merchant effects, potential expansion, lessons learned, and short-term
challenges.
The History of EBT
Technological advances in the financial world have made conducting transactions through
electronic means like debit cards, cheaper and easier than transactions conducted through
physical ones like paper coupons. Cognizant of technology’s potential to lower the costs of
government programs, the Food and Nutrition Service (FNS), the branch of the U. S. Department
of Agriculture (USDA) responsible for the Food Stamp Program (FSP), initiated the nation’s first
EBT pilot project in 1983 in Reading, Pennsylvania (Table 1).1 While electronic food stamps
proved more expensive to operate than paper-based ones, the initiative’s popularity among
benefit recipients and merchants, coupled with its cost-saving potential, led FNS to initiate other
experiments, several of which involved delivering other social benefits electronically in an
attempt to share costs among programs.
The demonstration programs attracted increased political attention during the early 1990s, when
a policy environment desirous of “paperless” government emerged in Washington. Congress
endorsed EBT as an alternative to paper food stamps in 1990,2 and Vice President Al Gore’s
National Performance Review backed EBT and developed a national implementation plan.3
The most important step in EBT’s development came with the 1996 passage of the Personal
Responsibility and Work Opportunity Reconciliation Act (PRWORA). This congressional act
required states to deliver food stamps electronically by October 1, 2002.4 Members of both
parties viewed EBT as a way of reducing the FSP’s administrative costs and fraud losses. As an
example of EBT’s potential, a 1996 cost-benefit analysis predicted that it would produce annual
federal savings of $195 million by the year 2000.5
The State of EBT 6
Although PRWORA required states to develop EBT for food stamps, many states chose to
develop systems that would permit the delivery of additional federal and state social benefits.
Like the federal government, states hoped to save money through the lower costs theoretically
associated with electronic systems. Optimistic estimates surrounded the development of EBT
systems. New York, for instance, originally estimated that its combined food stamp and cash
benefit issuance costs would fall from $6 per month per client to $2.60.6 Other states projected
similar reductions. Since PRWORA’s passage, states have been implementing EBT systems to
meet the deadline.
National Trends
As of summer 2001, 39 states, the District of Columbia, and Puerto Rico (subsequently referred
to as 41 states) had active statewide EBT systems. The remaining states were experimenting with
pilot programs, negotiating contracts, or preparing to activate full systems. Table 2 summarizes
where each state stands. Most of the attention in this working paper will focus on those with
Table 1: EBT Development Timeline
Year Event
1983 USDA begins first EBT pilot program in Reading, Pennsylvania.
1988 EBT pilots begin in Albuquerque, New Mexico; Ramsey County,
Minnesota; and the Park Circle District of Baltimore, Maryland.
1990 Leland Domestic Hunger Relief Act amends Food Stamp Act of 1977 and
allows EBT as an alternative to paper food stamps.
FNS develops EBT regulations. The basic framework remains in effect.
1993 Maryland’s EBT program expands statewide, making it the first statewide
system in the country.
National Performance Review endorses EBT.
1994 Federal Electronic Benefits Transfer Task Force releases national EBT
implementation plan.
First off-line EBT pilot begins in Dayton, Ohio.
1996 Congress passes Personal Responsibility and Work Opportunity
Reconciliation Act, which mandates EBT for the Food Stamp Program.
2000 Congress passes EBT Interoperability and Portability Act.
2001 (Summer) 41 states have statewide EBT systems in place.
2002 (October) Deadline for states to implement EBT systems for the Food Stamp Program.
Table 2: EBT Status by State
Status State
Statewide Program Implemented AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI,
ID, IL, KS, KY, LA, MD, MA, MI, MN, MO,
NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA,
PR, RI, SC, SD, TN, TX, UT, VT, WA, WI,
WY
Pilot Programs Operating CA, IN, IA, VA
Negotiating Contracts DE, Guam, ME, MT, Virgin Islands, WV
Preparing to Go Active NE, NV
The State of EBT 7
Graph #1: Five Most Common EBT Benefits
(Center For Community Capitalism)
41
33
13
12
9
0 10 20 30 40 50
Food Stamps
TANF
State GA
Refugee Assistance
SSI
Benefit Type
Number of States
statewide programs already in place.
Benefits Delivered via EBT
States use EBT to deliver food stamp and non-food stamp benefits, though PRWORA only
requires them to provide electronic food stamps. All 41 states with statewide systems deliver
food stamps as required, and 80 percent of national FSP benefits now are delivered
electronically.7 Furthermore, 33 of the 41 states also deliver TANF benefits electronically. Other
popular benefits being delivered include general assistance benefits (13 states), refugee
assistance (12 states), and Supplemental Security Insurance (SSI) (9 states).8 Additionally, some
states are experimenting with delivering Women, Infants, and Children (WIC) benefits, child
support, health insurance, childcare payments, and welfare-to-work initiatives. Graph 1 shows
the frequency of offered benefits. Note that the typical state offers food stamps, TANF, and one
other benefit. Non-food stamp benefits like TANF normally are delivered through ATM or POS
machines, though some states experimenting with WIC benefits have been moving toward smart
cards.
Direct Deposit and EBT
As mentioned earlier, EBT is
an outgrowth of a broader
movement that seeks to use
technological advances in the
financial world to deliver
government benefits in a more
cost-effective way. A related
technology is Electronic Funds
Transfer (EFT), commonly
known as direct deposit,
through which recipients may
choose to have their
government benefits deposited
directly into a bank account.
The difference between EFT and EBT systems is that an individual must have a bank account in
order to use EFT, while EBT systems use bank structures like ATMs as conduits between benefit
recipients and a state-maintained account.9 Unlike EBT, EFT connects low-income people
directly to the financial mainstream.
Research suggests that bank accounts offer numerous benefits to low-income citizens. Opening
bank accounts allows people to save money, earn interest, build credit histories, and move
toward homeownership. Connecting low-income people to the banking system also provides
banks with the market information needed to develop products tailored to the needs of the newly
banked.10 Because of these advantages, many states have incorporated EFT options into their
EBT systems. EFT options exist within 18 EBT programs, though little is known about the usage
of this option. Forty-three percent of the states with EFT options are in the Northeast and
Midwest, and two states, Connecticut and Florida, have developed direct deposit options with
particularly innovative elements.
The State of EBT 8
Connecticut offers all recipients of cash assistance the option of establishing an EFT account that
allows four free ATM withdrawals a month. The state also offers an enhanced direct deposit
option that provides other features.11 Florida, meanwhile, has partnered with First Union Bank to
create a direct deposit account that allows three free transactions per month, unlimited deposits,
unrestricted POS access, privacy safeguards, one free replacement card per year, and a monthly
service fee capped at $3.12
In spite of its potential, EFT has not reached many of those who could benefit from the
establishment of bank accounts. Some states do not allow the option, while participating states
have encountered difficulties spreading the word. This may be due in part to the limited outreach
and training methods used in many states, but it also may be due to the fact that there is less of an
economic incentive for EBT vendors to promote direct deposit. Under many state EBT contracts,
vendors receive a lower fee for clients who receive cash benefits via direct deposit than for those
who receive benefits through EBT. Also, financial institutions have little incentive to encourage
the creation of low-balance, high-activity accounts.
Another form of EFT offered in some states is electronic bill payment. In New Hampshire,
recipients may authorize up to three free electronic fund transfers from their state-maintained
benefit account to vendors approved by the state.13 Connecticut offers a similar option, while in
the District of Columbia, benefit recipients have the option of paying their utility bills
electronically through POS machines installed in public housing complexes.14
The Mechanics of EBT
Though many states deliver multiple benefits through EBT systems, they only are required to
provide food stamps. Since EBT systems operate differently depending on the benefits being
delivered, an understanding of EBT requires basic familiarity with the two main benefit types:
food stamp and non-food stamp.
Benefit Type #1: Food Stamps
The FSP is a means-tested federal entitlement that helps low-income Americans buy food.
Qualifying individuals and families receive income supplements that may be used to purchase
nutritious food at authorized retail establishments. Seventeen million people received assistance
at a total cost to the federal government of approximately $17 billion during fiscal year 2000:
Approximately $15 billion in benefits, and $2 billion for the federal government’s half of the
administrative costs.15 Clearly, any technology capable of reducing costs could result in
tremendous savings.
Benefit Type #2: Non-Food Stamp Benefits
An array of social programs, ranging from TANF to home energy assistance, is delivered via
EBT. Some of these programs are funded and administered entirely by the federal government
(i.e., Supplemental Security Income or SSI), others are federally funded and state administered
(i.e., TANF), and still others are financed solely by states (i.e., General Assistance).16 For the
purpose of EBT, the most important non-food stamp benefit is TANF.
The State of EBT 9
Created in 1996 as part of PRWORA, TANF replaced Aid to Families with Dependent Children
(AFDC). Instead of providing low-income citizens with cash entitlements, TANF provides states
with $16.8 billion in block grants that may be used in any manner consistent with program
goals.17 While the federal government contributes the bulk of TANF’s funding, states also are
expected to contribute and are responsible for daily administration. Again, finding ways to
reduce costs is of interest to the states and federal government.
How EBT Delivers Food Stamp Benefits
EBT is an electronic payment system that allows food stamp benefit recipients to pay for goods
by transferring funds from a government-maintained account to a retailer’s bank account. In
most states that deliver food stamp benefits via EBT, benefit recipients receive a plastic card
with a magnetic stripe, resembling a debit card (Figure 1), and a personal identification number
(PIN). When benefit recipients purchase food, they inform the clerk that they wish to pay with
EBT; swipe their cards at a POS terminal located at the cash register and enter their PIN.
The clerk presses a button on the cash register, which sends the transaction via phone lines
(maintained by the EBT vendor or a third-party processor) to the EBT vendor’s processing
center. Computers at the processing center check whether the requested transaction has
originated from a valid terminal, involves an active case (based on records regularly sent by the
state), uses a valid PIN, and does not exceed the account balance. If those conditions are met, the
computer authorizes the transaction and sends approval to the cash register. The clerk completes
the transaction, and the benefit recipient leaves with groceries.18 Note that USDA regulations
prohibit merchants from assessing surcharges on electronic food stamp purchases.
At the end of the EBT vendor’s business day, the vendor’s computers total all food stamp sales
each authorized merchant made via EBT and transmits that information through the Automated
Clearinghouse Network (ACH) to a Federal Reserve Bank. The EBT vendor electronically
informs the state how much money needs to be available to honor that day’s EBT transactions.
The state’s computers request the funds from the USDA, which sends the funds electronically
through the Treasury Department to the state’s bank account. The state transmits the funds to the
EBT’s vendor bank account. Once funds are in place, the money is transferred from the vendor’s
account through a Federal Reserve Bank and deposited in each merchant’s financial institution.
At this point, the merchant’s transactions for the day are settled. Funds will be available in two
or three business days, depending on the policies of the merchant’s bank. The EBT vendor also
daily transmits transaction account information to the state, so the account records of each
benefit recipient can be balanced.19
Figure 1: Sample EBT Cards–Dakotas, Maryland, and Indiana
The State of EBT 10
How EBT Works to Deliver Non-Food Stamp Benefits
In states where benefits besides food stamps are delivered through EBT, recipients access their
food stamps in the manner described above. To draw cash benefits like TANF, recipients use the
same card and PIN at either POS machines or ATMs. Many states that provide non-food stamp
benefits permit recipients to access their cash benefits at POS machines located in food stores
and receive cash from the clerk. Cash transactions are processed in the same manner as food
stamp transactions, though the transactions cannot be processed simultaneously.20 If recipients
wish to tap both benefit streams, they must inform the clerk, swipe their EBT card and enter their
PIN twice. Before processing each transaction, the clerk presses a different key to properly route
the transaction. At the end of the EBT vendor’s business day, non-food stamp transactions are
settled in a manner similar to the one used to settle food stamp transactions. Note that many
states permit merchants to assess vendor fees or surcharges on non-food stamp benefits.
On-Line versus Off-Line EBT Technologies
The procedures described above apply to on-line EBT technology, which is used by all but two
states with active statewide systems. On-line systems function in a manner similar to commercial
debit or credit cards. When the EBT card is swiped through a POS machine, the information
contained in the magnetic stripe―normally the benefit recipient’s name, EBT account number,
and PIN―and information regarding the requested transaction are transmitted via telephone lines
to the EBT vendor’s processing center for authorization. This need for a live telecommunications
link is what constitutes “on-line” technology.21
Ohio and Wyoming use off-line systems. Off-line systems depend on smart cards, which are
plastic cards that resemble debit cards in size but contain a microchip. The microchip stores all
the information needed to complete an EBT transaction, including account balances, directly on
the EBT card. When a benefit recipient uses the smart card to purchase groceries, the card is
inserted in a smart card reader attached to the cash register. Since the smart card contains all of
the required information, there is no need for an on-line connection to the EBT vendor’s
processing center until the end of the business day when the merchant electronically transmits
information pertaining to completed EBT transactions. The vendor settles the transactions and
creates a shadow account for each benefit recipient, which may be used to restore benefits if an
EBT card becomes lost or damaged.22
EBT’s Design, Procurement Models, and Vendors
When EBT was proposed, the USDA recognized that building the EBT infrastructure from
scratch would be cost prohibitive. A feasibility study estimated it would take $233 million to
$291 million, with terminal installation being the most expensive part.23 The USDA thought that
if EBT could be integrated with existing commercial processing systems, the costs would fall to
an affordable level. Unfortunately, such integration proved more difficult than expected since
EBT, unlike debit card systems, required the flexibility to deliver multiple benefits subject to
various government regulations.24 The complexities involved in developing such systems have
not only led states to contract with private vendors, but also shaped how EBT systems operate.
Consequently, a familiarity with EBT’s procurement models, pricing plans, and market actors is
essential for understanding the technology.
The State of EBT 11
Procurement Models
States normally use one of three procurement models to obtain EBT systems.25 Each model
involves a prime vendor who manages the overall EBT system and subcontractors who
specialize in functional areas like card distribution. Since the procurement method selected
influences how a state’s EBT system operates, each method briefly is discussed. Table 2
summarizes the procurement methods used by the 41 states with statewide EBT programs.
Stand-Alone Procurement
In this method, an individual state purchases an EBT system on its own. The advantage of a
stand-alone procurement, used by 16 states, is that it allows a state to negotiate a contract
specifically tailored to its needs. States receive design flexibility and can experiment with
different benefits and technologies.26 Stand-alone procurements tend to work well for larger
states with high caseloads. Smaller states have encountered difficulties with stand-alone
procurements. Delaware’s attempt in 1999 to purchase a stand-alone system received no bids.27
Coalition Procurements
To achieve economies of scale, 23
states have joined purchasing
coalitions. The coalitions purchase the
same services obtained by stand-alone
states, but negotiate EBT contracts
jointly. While North Dakota and South
Dakota request proposals together,
other coalitions depend on a lead state
like New York to negotiate terms with
a vendor, who agrees to give coalition
members the opportunity to negotiate
for services within the framework
established by the lead state.28
Depending on the size of the lead
state, member states may receive
prices they would not otherwise receive. A downside of the coalition arrangement is that states
have less freedom to experiment with new programs, which is why Utah chose not to join a
coalition.29 The three coalitions are the Southern Alliance of States (SAS), the Western States
EBT Alliance (WSEA), and the Northeast Coalition of States (NCS).
State as Prime Contractor
Under the previous models, states negotiate with a prime contractor, and, as a result, are
constrained by the services and terms the contractor offers. This sometimes limits design
flexibility and benefits that can be delivered through EBT. Two states, Wyoming and Texas,
therefore have opted to serve as their own prime contractors. The social service departments of
these states negotiate directly with subcontractors to obtain the functions essential to an EBT
system.30
Table 3: Procurement Method by State
(Center for Community Capitalism)
Stand-Alone Procurement DC, IL, KS, LA, MD,
MI, MN, NJ, NM, OH,
OK, OR, PA, PR, UT,
WI
Coalition Procurement
Northeast Coalition CT, MA, NH, NY, RI,
VT
Southern Coalition AL, AR, FL, GA, KY,
MO, NC, SC, TN
Western Coalition AK, AZ, CO, HI, ID,
WA
Dakotas ND, SD
State Prime Contractor TX, WY
The State of EBT 12
Pricing Model
The dominant pricing model used in EBT systems has been the cost per case month (CPCM)
model in which a state is charged a fee for every active case in the system in a month.31 States
and vendors negotiate the specifics of the model (e.g., what constitutes an “active case”), but
irrespective of the details, the pricing model is extremely sensitive to changes in caseload levels.
If those levels fall rapidly, as has happened since the passage of PRWORA, vendors may find
themselves unable to cover their costs and recoup their investments. In fact, national
participation in the FSP decreased by 33 percent between federal fiscal years 1996 and 2001.32
Such decreases in caseload may lead to poorer service and higher prices, and drops in volume
and profitability may dissuade other vendors from entering the EBT market.
Market Evolution and Actors
When EBT expanded nationally, many financial institutions and computer processing companies
expressed an interest in the market. Early players in the EBT market included Mellon Bank, First
Union, NationsBank, IBM, Unisys, First Security, GM Group, and Zions Bank.33
As time passed, many of the firms encountered difficulties. Not only did it prove more
complicated than expected to deliver electronic food stamps, but also many firms were unsure
how to set an appropriate CPCM. The pricing issue was especially vexing because EBT required
extensive initial capital investments that would be recovered through the CPCM. Additionally,
many smaller firms capable of providing elements of EBT were unable to compete for EBT
contracts since states purchased all EBT services from a prime vendor, who in turn contracted
with other firms for specialized services. Unless a specialized firm managed to subcontract with
a larger vendor, the firm was excluded from the EBT market. As a result of these factors, the
EBT market gradually thinned.34
A few successful firms eventually emerged in the EBT market, with the big winner being
Citicorp Services, Inc. (CSI). CSI managed to capture the bulk of the market by designing a
standard EBT platform that could be deployed in any state. CSI also benefited by having access
to the extensive commercial-processing network maintained by its parent, Citigroup.35 Like CSI,
two other firms, e-Funds and Transactive Corporation, developed standard EBT platforms and
obtained state contracts. Lockheed Martin IMS enjoyed some success in the EBT market, though
it lacked the full processing systems possessed by its competitors.
The passage of time further thinned the market as states’ benefits caseloads declined.
Transactive, a G-Tech subsidiary, held contracts in Illinois and Texas but encountered financial
troubles. Under Transactive’s contract with the state of Texas, the company earned $2 per food
stamp client per month and $0.97 per TANF client per month.36 When the contract began, Texas
had a total caseload of 1.2 million, but the caseload eventually fell by 50 percent, causing
Transactive to incur large losses. Transactive attempted to sell its EBT assets to CSI for $11.5
million, but the U. S. Justice Department successfully blocked the sale on antitrust grounds.37
Transactive then left the EBT market,38 but not before granting GM Group the right to use its
equipment to provide EBT services in Puerto Rico.39
Meanwhile, Lockheed Martin IMS and e-Funds began to partner with CSI on numerous state
contracts. CSI normally served as the prime vendor, while the other firms acted as
The State of EBT 13
subcontractors. For Lockheed, subcontracting was the only way to remain in the EBT business
since the firm lacked the processing systems owned by CSI and e-Funds. This limited ability to
compete led Lockheed in July 2001 to sell its EBT business to Affiliated Computer Services, Inc.
(ACS), a firm that had recently developed EBT processing equipment.40
Today CSI, e-Funds, and ACS are the
three significant players in the EBT
market, with CSI leading the industry.
As Table 3 indicates, CSI holds prime
contracts in 30 of the 41 states with
statewide systems and subcontracts in
two additional states. CSI also has
negotiated noncompete agreements with
e-Funds, thereby insuring that e-Funds
will not bid against CSI when certain
contracts are rebid.41 These
developments have led to a market with
limited competition. For example, when
California solicited bids in 2001, it
received only one, from CSI.42
While CSI occupies a prominent place in the EBT industry, other firms recently have attempted
to enter. ACS purchased Lockheed’s EBT business and may compete against CSI in the near
future when a series of state contracts come up for renewal. Another new market entry occurred
when TRW secured Idaho’s contract.43 Moreover, the development of off-line EBT projects for
the delivery of WIC has attracted vendors like Stored Value Systems―which serves as a
subcontractor to CSI in Ohio44 ―into the market and may create niches for firms that specialize
in off-line systems. Such developments may signal a change in the EBT market.
Financial Impacts on the Federal Government and the States
The federal government initially viewed EBT as a way of lowering the administrative costs and
fraud losses associated with FSP. It also was thought that, by extension, states would save
money. Yet it is unclear whether these savings have materialized. The following sections
consider EBT’s impact on administrative costs in both food stamp and non-food stamp benefit
programs before turning to the issue of fraud reduction, particularly within FSP.
Impact #1: Administrative Cost Reductions
EBT’s overall impact on administrative costs appears mixed, though the effects are difficult to
gauge since accurate figures are unavailable. The Center for Community Capitalism’s 2001
survey of statewide EBT programs revealed that many states reported cost savings, but the
administrators who completed the survey provided few figures. Moreover, the numbers are
difficult to compare since states deliver different benefits via EBT and measure savings
differently. Arizona, for instance, reported general cost reductions of $150,000 to $300,000,45
while Texas reported combined federal and state savings of $126 million as of 2001.46 Some
states like Alaska claim that EBT systems cost more than the paper-based system.47 Similarly,
Table 4: Prime Contractor by State
(Center for Community Capitalism)
Citicorp Services, Inc. AK, AL, AZ, AR, CO,
CT, FL, GA, HI, ID, KY,
MD, MA, MI, MN, MO,
NH, NM, NY, NC, ND,
OH, PA, RI, SC, SD, TN,
VT, WA, WI
e-Funds KS, LA, NJ, OR, UT
Lockheed Martin/ACS DC, OK
Transactive IL
GM Group PR
State Itself TX, WY
The State of EBT 14
Nebraska, which activated its EBT system in the autumn of 2001, estimated that EBT would cost
more than paper food stamps. Nebraska calculated that EBT would raise administrative costs
from $2.10 to $3.20 per recipient per month, and total annual costs would rise from $880,000 to
$1.3 million.48 Such contradictory reports suggest that EBT has not achieved the across-the-board
savings originally envisioned by its supporters, even though some states have saved.
Despite these data limitations, it is possible to offer some insights into EBT’s impact on the
administrative costs associated with food stamp and non-food stamp benefits. The USDA’s 1994
evaluation of Maryland’s statewide EBT program―used to deliver food stamps, AFDC, and
three other non-food stamp programs―found that the overall CPCM of issuing all benefits
electronically ($3.85) was slightly lower than the comparable paper ($3.89). Annualized, EBT
yielded $120,000 (1993 dollars) in combined savings.49
When considering program costs in EBT, it is necessary to consider the allocation of savings in
addition to total savings. In Maryland, the administrative costs associated with authorizing,
delivering, redeeming, monitoring, and managing food stamps decreased, but the administrative
costs associated with non-food stamp benefits rose. The ultimate result was that the increased
cost of delivering non-food stamp benefits electronically nearly offset the FSP savings.50
It is not surprising that EBT raised the delivery costs of non-food stamp benefits. Prior to EBT,
non-food stamp benefits were delivered via paper checks―a relatively inexpensive payment
method for the government, though not necessarily for benefit recipients if they incurred check-cashing
fees. Switching to EBT for non-food stamp benefits replaced a low-cost, paper-based
delivery mechanism with a more expensive one. EBT processes every transaction through ATM
or POS networks, which charge for their services. These fees represent a cost that did not exist
prior to EBT, 51 and the incidence of these costs has become a contentious issue.
Meanwhile, food stamp savings in Maryland resulted from a variety of factors. First, EBT
lowered the costs associated with approving people for food stamp benefits and establishing their
benefit accounts by reducing the time and labor needed to complete these tasks. In addition, by
eliminating paper coupons, the system also eliminated all of the costs associated with printing,
handling, redeeming, and destroying paper food stamps. Second, the processing costs associated
with electronic food stamp benefits were lower than those associated with non-food stamp
benefits since food stamp benefits were delivered through POS systems, not ATMs. The size of
ATM fees, coupled with the higher number of ATM transactions, made ATM transactions more
expensive than POS transactions. Third, electronic food stamps reduced fraud.52
The difference in savings between food stamp and non-food stamp benefits was not
unanticipated. A 1990 USDA evaluation predicted that monthly operating costs for a national
EBT system would exceed the monthly operating costs of the existing paper-based system,
though the increase would be partly offset by fraud reductions and improved public perception of
program integrity.53 The potentially higher cost became an issue when Maryland was planning its
EBT program during the early 1990s. The federal Department of Health and Human Services
(DHHS), which oversaw AFDC (now TANF), recognized that AFDC costs could rise under EBT
and leave the agency with a financial liability, but the USDA, which already had run and
evaluated EBT pilots for food stamps in several jurisdictions, expected to save money. These
The State of EBT 15
competing interests led DHHS, USDA, and Maryland to negotiate the EBT Single
Administrative Grant (EBTSAG). This document required Maryland’s planned EBT project to
be cost-neutral to the federal government. Neither USDA nor DHHS would pay more for EBT
than for paper benefits; if EBT cost more, then Maryland would absorb the difference. In return,
USDA and DHHS agreed to combine resources and pay half of the system’s administrative
costs. EBTSAG was significant because it established the concept of cost neutrality, which has
evolved into a cornerstone of federal EBT policy.54
The USDA’s evaluation of Maryland’s EBT program found that EBTSAG influenced the
division of costs between the federal government and the state. After accounting for federal
reimbursements, the evaluation found that the federal government saved money under EBT
while the state government spent more. This happened because the federal government
eliminated the costs associated with printing paper coupons, while the state incurred new costs
dealing with the EBT vendor.55
In subsequent years, external factors also have influenced EBT’s costs. Most notably, the federal
Telecommunications Act of 1996 allowed telephone companies to charge telephone call centers
$0.29 for calls originating from pay phones.56 Since EBT vendors process all transactions and
provide all customer service functions through telephone centers, EBT costs increased, and
vendors passed those costs on to the states. Arizona, for instance, estimates that this change alone
raised its EBT costs by $12,000 per month.57
Impact #2: Impact on Fraud
EBT has enriched the ability of the government to detect fraud in both food stamp and non-food
stamp programs, though fraud always has been a more pressing matter within the FSP because
benefits are restricted to the purchase of certain goods. Since the government does not restrict the
use of non-food stamp benefits, this form of fraud was never an issue. This section of the
working paper therefore focuses primarily on EBT’s impact on food stamp fraud, with some
attention given to non-food stamp benefits.
Illegal Trafficking of Food Stamp Benefits
Benefit trafficking, which occurs when recipients sell their benefits at a discounted rate to
retailers in exchange for cash, is the most significant form of food stamp fraud. Fraudulent
retailers typically pay a recipient $0.50 for every $1.00 in benefits and then redeem the food
stamps at their face value.58 The USDA estimated that the trafficking rate between 1996 and
1998 equaled 3.5 percent of benefits issued.59
Responsibility for detecting trafficking is divided between the FNS and the states. The FNS is
charged with monitoring retailers for program compliance, while states attempt to detect fraud
among benefit recipients.60 Since trafficking involves both retailers and benefit recipients, the
FNS and the states need to coordinate their efforts. When the FNS investigates a retailer, it
normally provides the appropriate state with a list of benefit recipients suspected of trafficking,
and the state is supposed to follow up on the leads.61 Unfortunately, this two-tiered approach
historically has not worked well because proving fraud against benefit recipients and retailers has
required the use of lengthy and costly undercover investigations and e FNS has lacked the ability
to enforce fines. The General Accounting Office (GAO) found that the USDA collected only 13
The State of EBT 16
percent of assessed fines between 1993 and 1998 and deemed 55 percent of the total fines, or $49
million, uncollectible.62
EBT has the potential to improve this situation. Between 1993 and 1998, the trafficking rate fell
half a percentage point, a decline that both the USDA and GAO have attributed partly to EBT.63
EBT systems, however, are not immune to trafficking. Merchants can pay benefit recipients a
discounted rate for the electronic food stamps, run the recipient’s card through a POS terminal,
enter the recipient’s PIN, and receive the full benefit amount. An example of this occurred in
Portland, Oregon, when the owners of a small grocery used trafficked EBT food stamp benefits
to redeem an amount $250,000 greater than the store’s gross food sales.64
Nevertheless, EBT renders trafficking easier to detect because electronic transactions generate
digital records that can be analyzed with computers. Instead of conducting lengthy and expensive
undercover operations, investigators are allowed under PRWORA to mine transaction records for
patterns that indicate illegal activity and use that evidence against violators.65 This happened in
Louisiana, where investigators matched EBT transaction records to state sales tax records to
apprehend a ring of grocery stores responsible for trafficking $20 million in food stamp benefits
and transferring the proceeds to the Mideast. What caught the attention of investigators was the
fact that, in certain stores, EBT transactions accounted for 52 percent to 115 percent of the
store’s total food sales, while the state average for retailers was 9 percent.66 A similar example
occurred in New Jersey, where investigators found a store redeeming $100 in food stamps every
six minutes.67
Other Forms of Food Stamp Fraud and Non-Food Stamp Fraud
Though trafficking is a form of fraud unique to food stamps, it is not the only form of fraud. The
U. S. Secret Service, which polices fraud in EBT systems, has observed, “EBT is open to a wide
variety of fraud, including multiple false applications for benefits, counterfeiting of the EBT
card, and trafficking of noncash benefits for cash or contraband.”68
Mail fraud also affects food stamp and non-food stamp programs. However, by reducing the
need to mail benefits, EBT has helped to reduce the theft of those benefits. According to the
Center for Community Capitalism’s survey of EBT programs, many states claim to have
eliminated mail fraud.69
Another type of fraud occurs when people use false names to apply for and receive multiple sets
of benefits. EBT currently is unable to detect this type of fraud, though technological
modifications eventually could allow EBT to do so.
Consumer Effects
EBT systems are designed to deliver social welfare benefits to qualifying individuals, and the
experiences these recipients have with the system need to be considered. Gauging effects on a
national level is a complicated undertaking since EBT programs and the accompanying
consumer issues differ among states. Concerns in a state that delivers both food stamp and non-food
stamp benefits may not apply to states that only provide food stamps.70 Nevertheless, a
The State of EBT 17
review of the available literature suggests that nine significant consumer issues pertaining to
EBT have arisen:
􀂾􋸠 Surcharges and fees
􀂾􋸠 Recipient training
􀂾􋸠 Customer service
􀂾􋸠 Technological failures
􀂾􋸠 Consumer protection
􀂾􋸠 Interoperability
􀂾􋸠 Privacy
􀂾􋸠 Card replacement
􀂾􋸠 Access to farmers’ markets
Overall Consumer Satisfaction with EBT
It is difficult to speak definitively about the satisfaction of EBT recipients because EBT
programs differ among states and no comprehensive studies have been attempted. The existing
literature consists of studies of particular states, and many of these analyses are qualitative
surveys of EBT administrators and advocates for benefit recipients that ask these stakeholders
what they understand EBT’s impacts on recipients to be. Nevertheless, it is possible to offer
some general insights into consumer satisfaction with EBT.
Overall, benefit recipients appear satisfied with EBT, particularly the food stamp aspect of the
program. A survey of advocates and EBT administrators in ten states and two pilot projects in
California counties revealed that most respondents generally preferred EBT to paper food
stamps.71 This observation is supported by various state-specific studies of EBT recipients. The
earliest comprehensive study of a statewide EBT program occurred in Maryland (which delivers
both food stamp and non-food stamp benefits) and found that an overwhelming majority of
benefit recipients preferred EBT.72 Reasons for the preference included greater benefit security,
enhanced convenience, and reduced social stigma, because using paper food stamps at the store
clearly identified the user as a benefit recipient. The continued validity of these results is
hindered by the fact that they are dated and the way in which non-food stamp benefits are
delivered has changed. At the time of the evaluation, Maryland allowed non-food stamp benefit
recipients to use ATMs for free; this is no longer the case.
The general findings of the Maryland evaluation received support from the North Carolina
Financial Services Survey, a study of past and present North Carolina welfare recipients
conducted in 2001 by the Center for Community Capitalism. Respondents were asked a series of
questions pertaining to their experiences with the EBT system (food stamp only). Sixty percent
of respondents claimed to have only positive reactions to EBT, and less than 1 percent claimed to
have overwhelmingly negative attitudes.73 Consistent with the Maryland evaluation, the most
commonly cited reasons for positive reactions were the system’s ease and reliability (69 percent)
and security (15 percent).74
Another positive aspect of EBT is that it may have decreased the participation costs of benefit
recipients. Under paper-based food stamps, recipients needed to redeem their benefits at banks or
check-cashing establishments, a process that often involved such out-of-pocket expenses as
The State of EBT 18
Graph #2: Number of Free ATM Transactions
(Center for Community Capitalism)
9
7
3
11
1
0
2
4
6
8
10
12
0 2 3 4 Unlimited
Number of Free ATM Transactions
Number of States (n=31)
Graph #3: Fees for Additional ATM Transactions
(n=31)
(Center for Community Capitalism)
1
1
1
1
22
2
3
$0.00 $0.33 $0.40 $0.45 $0.85 $0.50 $1.00
transportation and childcare. Since the need to redeem benefits in this manner is not part of EBT,
these out-of-pocket costs theoretically were eliminated.
Such findings support the claim that benefit recipients generally are satisfied with EBT. This
does not mean that the system is perfect. Certain problem areas, particularly with the delivery of
non-food stamp benefits, need to be understood and addressed if EBT is to realize its goals.
Issue #1: Vendor Fees and Surcharges
This is perhaps the most contentious issue in EBT. Though USDA regulations prohibit
merchants from charging fees and surcharges for purchases made with electronic food stamps,75
these regulations do not apply to non-food stamp benefits like TANF. With the exception of New
Mexico, all states that deliver cash benefits via EBT allow recipient access to cash to be limited.
Recipients are allowed a certain number of free cash transactions per month (between zero and
four, with four being the most common). After the limit is reached, the EBT vendor may assess
a fee on subsequent transactions (see Graph 2). The typical fee is $0.85 (see Graph 3).
Additionally, recipients may incur surcharges, ranging from $1.00 to $2.00 in some states, when
they access cash at ATM or POS machines.76
Understanding the Fee Structure
Before further exploring the link between EBT and fees, it is important to discuss the three main
types of fees assessed at ATMs. Shortly after banks began deploying ATM machines, they
realized they could lower transaction costs by increasing transaction volumes. A simple way to
accomplish this was to link their machines to the ATMs operated by other banks.77 This resulted
in the creation of ATM networks like Cirrus and Plus. When a person with an account at one
bank uses a network ATM owned by another bank, the person’s bank is charged an interchange
fee, which passes along the cost incurred by the ATM’s owner to execute the transaction over the
network. To compensate for the interchange fee, the person’s home bank may levy a foreign fee
on the consumer. Since 1996 network policies also have allowed banks and other ATM owners
to assess direct surcharges on noncustomers. This allows banks and ATM owners to make
serving noncustomers a discrete profit center.
Such flat fees can be significant on small transactions like those typically conducted by benefit
recipients. For instance, typical fees for a $25 transaction could easily be 8 percent, if the ATM
The State of EBT 19
owner charges a $1 surcharge and the home bank a $1 foreign fee. To minimize the fees’ impact,
consumers could withdraw higher sums of money (e.g., $100 instead of $25), but the trade-off is
the increased security risk involved with carrying cash. From the consumer’s standpoint, ATM
fees, particularly surcharges, are unpopular ways of making people pay for their money. Banks
view the charges as valid ways of passing along costs, generating revenues, and financing the
placement of off-site ATMs. However, ATM fees raise equity concerns because minority
neighborhoods are more likely to have ATMs that charge surcharges than nonminority areas.78
ATM Fees and EBT: New York City As An Example
A 2001 report by the New York State Comptroller noted that prior to EBT, the state’s benefit
recipients received their food stamp and non-food stamp benefits twice a month at participating
check cashers. The check cashers received a fee from the state in return for this service. Under
New York’s EBT contract with CSI, cash recipients receive four free transactions per month at
Citibank ATMs. If recipients make more than four transactions, they pay $0.85 per transaction.
Moreover, if individuals use a non-Citibank ATM to access their welfare benefits, they may be
assessed a direct surcharge of $1 to $2, depending on the ATM’s owner.79 A direct surcharge
also may be assessed if recipients receive cash back from POS machines.
Additionally, access to Citibank ATMs was limited for many New Yorkers. At one time, benefit
recipients residing in the three poorest zip codes in New York City had access to a total of six
free ATMs.80 This, coupled with other developments, led the New York State Attorney General
to sue CSI. As part of the settlement, CSI pledged to place an additional 149 free ATM machines
in low-income neighborhoods.81 Nevertheless, the combination of fees and limited access to free
ATMs has led to costs for benefit recipients. The State Comptroller estimates that recipients in
New York City paid $647,087 and $700,151 in fees during January and February 2001,
respectively.82 Under the previous system, many of these fees would not have been incurred.
State Responses to Fees and Surcharges
States have not been blind to the consumer impact of vendor fees and surcharges and are
working to mitigate their effect. Massachusetts, for instance, prohibits fees and surcharges at
POS machines but permits surcharges at ATM machines. However, the state has persuaded
banks to waive ATM surcharges for EBT recipients.83 Kentucky also has tried to persuade the
private market to provide free EBT access; it convinced Dairy Mart Convenience Stores to
modify their surcharge-free ATMs to accept EBT.84 This approach may provide retailers with a
competitive advantage.85
Other states have chosen a more regulatory approach. Minnesota has capped the total amount of
fees and surcharges that a recipient may pay at $10 per month.86 Illinois has tried to tackle both
fees and balance inquiries (discussed in next section) by granting recipients four free balance
inquiries each month in addition to four free withdrawals.87 All subsequent balance inquiries cost
$0.50 instead of the $1.00 charged for cash access. While such measures no doubt help benefit
recipients, these strategies―both the market-based and government-based ones―ignore the key
matter: Under EBT, benefit recipients pay “fees that most regular customers do not have to
pay―fees that are deducted from their welfare benefits.”88
The State of EBT 20
Balance Inquiries
Opinion is divided over whether or not benefit recipients should be permitted to use EBT to
check their balances. Disagreement also has emerged over whether or not recipients should be
charged for balance inquiries. From a consumer standpoint, the ability to check balances is
important because it helps people manage their finances, but vendors are concerned that benefit
recipients will check their balances too often, increasing operating costs.
States have responded to the balance inquiry issue in a scattered fashion. Six states prohibit
balance inquiries, while 14 allow unlimited inquiries. Five other states count balance inquiries
toward a client’s monthly allowance of free transactions. In some states where balance inquiries
are allowed, the vendor fees and surcharges described above may apply to those inquiries.
Additionally, all states note that benefit recipients may obtain balance information by calling the
EBT system’s toll-free service line and speaking to a customer service representative; but as will
be discussed later, questions have surfaced regarding the service lines. Access to balance
information raises equity questions, too, since non-EBT citizens easily may check their bank
balances at ATMs, and, prior to EBT, benefit recipients always knew their balances because they
could see how much cash they had left.
Issue #2: Recipient Training
EBT represents a fundamental shift in how food stamps work, so the USDA requires states to
provide recipients with hands-on training in EBT.89 Recipients should be taught how to use the
system, how to report lost or stolen cards, how to recognize participating stores, and how to
protect their rights.90 At least 27 states have received USDA waivers and use mailings to teach
current benefit recipients who are switching to EBT.91 New recipients who obtain in-person
training normally receive it from a caseworker, not the vendor, and the “typical training
programs include watching a video, practicing on a mock terminal, and asking questions of
caseworkers.”92
Many advocates question the effectiveness of EBT training. Mailings may be ineffective when
recipients have low literacy levels or limited proficiency in English, and the availability and
quality of in-person training varies widely. Training videos reportedly are “too short and do not
contain enough information on direct deposit options and other low-cost bank accounts.”93 Such
training methods may undermine EBT’s effectiveness.
Additionally, studies have found training coverage to be incomplete. For example, only 10
percent of New York City’s recipients received in-person training at conversion,94 while in North
Carolina about half of each county’s recipients received training.95
Issue #3: Customer Service
All EBT states require vendors to provide customer service, normally through the combination of
Audio Response Units (ARUs) and live service representatives accessible around the clock
through a toll-free telephone line.96 The ARUs and service representatives are supposed to assist
clients with EBT problems like lost or stolen cards, and provide balance and transaction
information. While no federal regulations apply to customer service standards, states have
specified performance measures such as average answer time, maximum hold time, abandoned
call rate, and number of callers who receive busy signals.97
The State of EBT 21
Unfortunately, many of the performance standards go unmet. During the period of June 1999
through March 2000, CSI fulfilled none of the service standards required under its contract with
the state of New York.98 CSI’s most serious failure pertained to hold time. While the contract
requires CSI to return to 95 percent of the calls placed on hold within 30 seconds, CSI never met
that requirement.99 What makes these results significant is that CSI handles the ARU functions
for all of its EBT contracts from the same three call centers, so if CSI is experiencing difficulties
in New York, it likely is missing standards in other states.100 This assumption is supported by a
Consumers’ Union study of EBT administrators and consumer advocates in ten states that found
respondents “reported problems with telephone wait times and busy signals.”101
The inability of vendors like CSI to meet service standards is related to EBT’s economic
structure. As discussed previously, EBT vendors have experienced financial difficulties and are
trying to recoup their initial investments by lowering costs. Reducing customer service is a
logical place for vendors to realize savings since the callers to the service line form a captive
audience; they have no other place to take their business.102 The result is that benefit recipients
may receive poorer service, while states fail to receive contracted services.103
Issue #4: Technological Reliability
A downside of computerized systems is that they may crash. In 1999, for instance, a telephone
line failed and caused the EBT systems in Georgia, Maryland, North Carolina, Florida,
Pennsylvania, and the District of Columbia to fail simultaneously for 24 hours.104 Such failures
inconvenience merchants and recipients.
Federal regulations require all EBT systems to develop manual backup procedures for use during
system failures.105 In most states, if the EBT system is down when a benefit recipient is
attempting to buy food, the merchant can call the EBT service line to request a transaction
authorization. If the authorization is given, the merchant uses a paper voucher to complete the
sale. When the system is repaired, the merchant uses the information on the voucher to settle the
transaction. While this procedure sounds straightforward, merchants dislike it since it is difficult
to reach the service line during technological failures, when a spike in call volumes taps the
service systems’ limited capacities, causing merchants to receive busy signals. This means that
the merchants must keep calling back, tie up the store’s customer flow, deny a sale, or issue an
unauthorized voucher. This last option is risky since, under EBT, merchants are liable if it later is
discovered that a recipient’s account has insufficient funds.
Benefit recipients may suffer in a variety of ways when EBT systems fail. Some merchants may
refuse to sell food during a system outage, thereby denying access to a necessity. This problem
may be compounded if the system remains down for an extended time. Another technological
problem that consumers confront is when the system incorrectly debits an account. For instance,
a benefit recipient may purchase $20 in food but have $25 in benefits deducted, or a consumer
may have a transaction denied yet still have benefits deducted. When such mistakes happen, the
recipient can go to the social service office and request a correction or emergency food stamps,
but this option is both time consuming and of limited use if the problem occurs after business
hours. Moreover, once a problem comes to light, its resolution may take time.
The State of EBT 22
An illustration of how a technological failure can affect benefit recipients occurred in 2001 when
a computer error interfered with EBT transactions across the nation.106 Some 6,000 transactions
were garbled, and as a result, people were improperly denied benefits, had their benefits debited
twice, or had their transactions denied but their benefits debited. When the problem came to light
in Missouri, the Department of Social Services told one recipient that re-crediting the account
could take up to 45 days and if food was an issue, the recipient should visit a food pantry. While
this particular woman’s experience is anecdotal, it demonstrates the potential impact that an EBT
failure can have on a person’s ability to obtain food.
Disaster Responses
A related question is what happens to benefit recipients during a natural disaster like a hurricane
or tornado that either results in people being eligible for emergency food stamps or prevents
existing recipients from using their benefits. The USDA requires states to develop disaster plans
for food stamp delivery, but states enjoy a great deal of latitude in developing disaster responses.
States like Florida and South Carolina depend on prepared EBT cards that contain a
predetermined benefit level (e.g., $50) and can be issued immediately to people deemed eligible
for disaster aid.107 These cards rely upon the same on-line technology that supports the states’
EBT systems. Other states like North Carolina require vendors to increase the production of
cards during a disaster, though this approach hinges on a vendor’s ability to produce enough
cards and ship them quickly to the disaster area. These two responses were put to the test when
Hurricane Floyd hit the Carolinas in 1999. North Carolina encountered difficulties when its
vendor could not produce and ship enough cards to the afflicted counties, while South Carolina’s
procedure, coupled with the storm’s smaller impact, allowed the state to respond in a better
manner.108
For these two disaster responses to function, the EBT technology must remain in operation. If the
technology fails, some states depend upon the manual voucher process described earlier, but
questions surround the manual system’s potential effectiveness during a large emergency. Also,
since the USDA’s regulations apply only to food stamp benefits, there exists no guarantee that
non-food stamp benefits delivered via EBT will be available during a disaster. Some states have
realized the potential impact that a disaster could have on EBT and have tried to be proactive, but
progress has been limited, partly because EBT vendors have moved slowly.
Issue #5: Consumer Protection
A contentious issue that emerged when the federal government was drafting EBT regulations
pertained to the extension of consumer protections to EBT. Section 904 of the Electronics Funds
Transfer Act (known as Regulation E) requires banks to provide consumers with certain
protections, including protection from unauthorized transactions. If a person loses a credit or
debit card and reports the loss or theft to the issuer within 48 hours, Regulation E limits the
person’s liability to $50 in the event the card is used to make unauthorized purchases.
In spite of state opposition, the Federal Reserve decided in 1994 that Regulation E protections
should apply to EBT programs. States with EBT systems were given three years to comply.109
Besides extending the liability protection, the Federal Reserve also stated that unused benefits
should be replaced in situations where an EBT card is lost or stolen. States were concerned
because they believed these provisions would allow benefit recipients to transfer or traffic their
The State of EBT 23
benefits illegally, claim their cards lost or stolen, and receive replacement benefits, leading
ultimately to higher state costs. States not only would be rewarding illegal behavior, but they
also would be powerless to stop such actions since, unlike banks, they could not cancel a
person’s account. Furthermore, states argued that applying Regulation E to EBT was
unnecessary because federal regulations governing FSP and state administrative procedures
regarding non-food stamp benefits already provided benefit recipients with adequate protections.
Advocates for benefit recipients responded by noting that extending Regulation E to EBT would
help recipients in several ways. First, the liability protection would cover people in situations
where ATM machines failed to dispense funds yet deducted benefits, or where ATM or POS
machines erred and charged someone twice for the same transaction. Second, Regulation E
provides more extensive protections than federal or state EBT regulations. Regulation E limits a
person’s total liability to $50, while administrative procedures typically state that recipients lose
all the benefits that are improperly used before the loss or theft is reported.110 If all the benefits
are used, the person loses all the benefits. This raises an equity concern since, without the
Regulation E protections, benefit recipients whose cards are lost or stolen are treated differently
from other consumers. Third, advocates noted that the monthly financial statements required by
Regulation E would help recipients better plan and manage their personal finances. Fourth,
advocates challenged the states’ assumption that benefit recipients “are more likely to lose their
cards, or … perpetuate fraud than the average citizen.”111 Finally, advocates argued that
extending Regulation E protections would add minimal costs to EBT.
In response to the conflicting claims, the USDA sponsored a one-year EBT pilot project that
explored the use of Regulation E in six locations in New Jersey and New Mexico.112 The results,
published in 1997, found that Regulation E had no significant impact on either the rate of
benefits reported as lost or stolen or benefit replacement costs. While Regulation E did increase
the administrative costs to states for processing and investigating claims, the study found that
these costs resulted from poor organizational designs and could be reduced by redesigning jobs
and merging lost/stolen card services with the EBT vendors’ help desk services. Nevertheless,
the Federal Reserve reversed itself and declared that EBT accounts were not “consumer asset
accounts” and were therefore exempt from Regulation E.113 The Electronic Funds Transfer
Association (EFTA), an EBT trade association, claims the decision to exempt EBT from
Regulation E was instrumental in EBT’s development. Without the exemption, so the EFTA
argues, states would have delayed implementation due to fears of open-ended liabilities.114
Issue #6: Interoperability: A Recipient’s Perspective
Under the paper-based system of food stamps, recipients could use their benefits at any
authorized food-stamp retailer. A resident of northern Indiana, for example, could cross the
border and use food stamps to shop at stores in Michigan, just as New York residents could shop
in New Jersey. Similarly, non-food stamp benefits could be used anywhere in the country. TANF
recipients in Oregon, for instance, could cash their benefits and use the cash in California. Under
EBT, states could end this practice by requiring that benefits be used only in the issuing state.
This possibility led advocates for benefit recipients and merchants to raise the issue of
interoperability.
The State of EBT 24
Interoperability refers to the ability of EBT systems in different states to communicate with each
other. When EBT first began, interoperability was a key issue since many states were pursuing
stand-alone procurements, and there existed no guarantees that EBT systems in any given state
would be compatible with others. In response, some states voluntarily addressed the problem by
collaborating in the development of QUEST.
Overseen by the National Automated Clearing House Association, QUEST is a series of
evolving rules intended to create a “uniform operating environment for EBT.”115 The voluntary
QUEST protocol currently is used in 31 of the 41 states with statewide EBT systems, and benefit
recipients who reside in a QUEST state can access their food stamp and non-food stamp benefits
in other QUEST states. The QUEST logo may be displayed at participating ATM and POS
machines, which visually informs consumers that their benefit cards are accepted at that
machine. This protocol has helped to preserve the portable nature of food stamp and non-food
stamp benefits by preventing the proliferation of incompatible EBT systems.
Nevertheless, QUEST is an imperfect solution. Since the protocol is voluntary, states do not have
to participate, which can lead to problems. For example, benefit recipients residing in the
neighboring cities of Gallup, New Mexico, and Window Rock, Arizona, are unable to shop in
each others’ cities since Arizona is a QUEST state but New Mexico is not. 116 The result is that
people potentially are limited in their choice of shopping places, and merchants lose out on sales.
Realizing that a lack of interoperability could derail the full implementation of a national EBT
system for food stamps, Congress passed the Electronic Benefit Transfer Interoperability and
Portability Act of 2000. This law requires states to develop interoperable EBT systems for food
stamp delivery, thereby ensuring the portability of food stamp benefits across state lines. While
the law does not address the portability of non-food stamp benefits, that may be less of an issue
since those recipients could cash the benefits in the issuing state and spend the currency in any
location of their choosing.
Issue #7: Privacy
Prior to EBT, benefit recipients could use their benefits without the government knowing how
they were being used. Food stamp recipients used their coupons at stores, and merchants
ultimately redeemed those vouchers, but in the process no records were created that could link a
transaction to a person. EBT has changed that.
Unlike the old system, EBT generates a record of each transaction. At a minimum, the system
records the transaction date and time, the total amount of the transaction, the type of benefit used
(e.g., food stamp or cash), and the location of the transaction.117 The potential exists to expand
EBT to track the kinds of goods being purchased. The USDA conducted a pilot program in South
Carolina to demonstrate the feasibility of linking EBT transaction data to the bar code data
scanned at supermarket cash registers.118 While information currently in EBT systems is not
shared with merchants or ATM owners, the state can use the information to detect fraud or in
other ways it sees fit. This ability raises questions about how client information is used and how
to balance the state’s interest in preventing fraud and delivering effective services against
privacy interests. One way that the state can strike this balance is by developing guidelines
regulating how information can be used and who can see that information.
The State of EBT 25
A related issue that has concerned some advocates is the technological ability to link EBT to
other parts of the social service system. New Mexico, for instance, plans to make EBT capable of
recording the time an individual spends on workfare assignments.119 Eligible benefit recipients in
New Mexico, as in other states, are required to spend a certain number of hours each week in
approved work activities; failure to comply may result in sanctions or loss of benefits. Some
critics question whether the state should collect data on the same card used to dispense benefits.
Errors could result in eligible recipients being unable to use their benefits until the problem is
resolved and thus impose undue hardships on low-income individuals.
Issue #8: Card Replacement
Having a card lost or stolen is a potentially serious problem for benefit recipients since they
cannot receive their benefits until a replacement card is issued. USDA regulations require that
cards be replaced within two days, but 26 states have received waivers that instead allow them to
replace lost or stolen cards within three to five days.120 Opinion is split over whether this is a
reasonable or punitive policy.
Card replacement is a significant cost in some states. Maryland estimates that it replaces 5 to 6
percent of its cards each month.121 To discourage lost cards and reduce costs, some states charge
replacement fees. These fees are permitted under USDA regulations, and the fee varies among
states. Both Minnesota and Colorado charge $2.122 While it makes sense on one level to assess
replacement fees, some advocates argue that these fees, which normally are deducted from a
person’s benefits, punish people who are not trying to cheat the system, but honestly may have
lost their cards.
Issue #9: Access to Farmers’ Markets
The purpose of FSP is to help low-income Americans purchase nutritious food. While the
overwhelming majority of food stamp purchases are made at supermarkets, farmers’ markets are
also a popular venue for food stamp purchases. These markets provide benefit recipients with
access to some of the freshest and most nutritious food available. Under the paper-based system
of food stamps, recipients could shop at farmers’ markets and use their food stamps like cash.
However, the move to EBT changed that; since many of these markets are held outdoors, they
lack access to the computer systems and telephone lines needed to process EBT, which threatens
to prevent recipients from shopping there.
To preserve access, the USDA began experimenting with ways of tailoring EBT to the farmers’
market environment. The first pilot began in 1998 in Hawaii and involved a scrip system.123
When food stamp recipients arrived at the market to shop, they first went to the manager’s booth,
which was equipped with POS equipment. The manager would debit the EBT card for the
amount requested by the recipient and provide scrip that could be used to purchase goods at
various stalls. If the recipient had scrip remaining at the end of the day, the manager’s booth
collected it and credited the recipient’s EBT account. Scrip projects have been replicated at other
sites around the country, including New Mexico and Washington State.
More recently, states have been experimenting with wireless technology, which does not require
the installation of phone lines, at farmers’ markets. The hope is that this will allow every market
The State of EBT 26
vendor to accept EBT, thereby eliminating the need for scrip. Florida experimented with wireless
technology in 2000, but technological difficulties troubled the initiative. Meanwhile, New York
City conducted a pilot in 2001, but the project’s success remains undetermined since evaluation
has not been completed. The District of Columbia also is considering the use of wireless
technology.124 While the idea remains unproven in a farmers’ market setting, it has gained
popularity. The farm bill that was passed by the U..S. Senate in February 2002 and currently is in
conference committee, provides $3 million in funding for wireless technology.125
Merchant Concerns
EBT’s impacts are not limited to governments and benefit recipients. The 156,000 retail
establishments (e.g., groceries, convenience stores, drugstores, and supermarkets) authorized to
redeem FSP benefits form a group with both a distinct set of financial interests in EBT and a
unique role in its success.126 These retailers enjoy access to a national food stamp market valued
at $15 billion a year,127 an interest that leads them to monitor policy changes to the FSP closely.
It is important to understand EBT’s impacts on merchants, who have five areas of particular
concern:
􀂾􋸠 System costs
􀂾􋸠 Government reimbursements
􀂾􋸠 Technological reliability
􀂾􋸠 System interoperability
􀂾􋸠 Cash flow
Concern #1: System Costs
Merchant participation in EBT is voluntary, though essential to success. The draw for merchants
is supposed to be EBT’s ability to reduce the time and costs involved in handling food stamp
transactions, but it is unclear whether these savings have materialized. In fact, the various
research studies that have been undertaken offer contradictory conclusions.
EBT’s Impact on Operating Costs for Food Stamps
Conventional wisdom, merchant feedback, and previous research indicate that paper food stamp
transactions cost merchants more to complete than non-food stamp transactions, cost differences
that advocates claimed would be at least partially alleviated by EBT. Food stamps are restricted
to the purchase of certain goods, requiring cashiers to distinguish between eligible and ineligible
goods. The manual system requires cashiers to categorize goods and accept the appropriate
payment forms, which results in slower checkout times. At the end of day, merchants need to
handle, deposit, and reconcile paper food stamps transactions. Additionally, merchants incur
costs related to training staff to recognize food-stamp eligible goods, reshelving items not
purchased due to insufficient food-stamp balances, failing to capture all proceeds due to manual
accounting errors, and losing interest during the time between accepting a food stamp and
depositing it at a bank.128
While many of the same kinds of costs are associated with EBT, advocates argued that EBT
would reduce certain costs and eliminate others. In particular, it was thought that EBT would
eliminate the back-office costs associated with paper food stamps, which merchants historically
The State of EBT 27
have complained about as being the most onerous part of participating in the FSP. However,
various research studies have documented mixed results regarding EBT’s impact on merchants’
operating costs.
One of the first studies to address merchant costs was the USDA’s 1994 evaluation of
Maryland’s statewide EBT program. Through the use of longitudinal data, the USDA compared
eight kinds of merchant costs under electronic and manual food stamp systems. The study
concluded that EBT had no impact on total costs. While EBT lowered total merchant costs by
$0.06 per $1,000 in redeemed benefits, this effect was deemed statistically insignificant.129 EBT
did significantly lower the back-office costs involved with handling, reconciling, and redeeming
food stamps, but this decrease was offset by a significant increase in checkout costs.130 In spite of
this outcome, the evaluation found that Maryland merchants generally preferred EBT to paper
food stamps and claimed EBT resulted in “easier handling” of transactions.131
These general findings have been supported by other studies. For example, a 2000 study of
merchant EBT costs in Pennsylvania sponsored by the Food Marketing Institute and the
Pennsylvania Food Merchants Association found that EBT reduced the costs involved with
handling paper coupons at the end of the business day but increased the time needed to complete
a food stamp transaction at the register by 19 seconds, due in part to the time spent waiting for
the EBT system to authorize the transaction.132 This translated into an overall net cost increase of
$0.064 per food stamp transaction. The finding that EBT lengthens transaction times was
consistent with an earlier USDA study of the Reading, Pennsylvania, pilot (the nation’s first EBT
project), which concluded that EBT “adds 10–15 seconds to the transaction time.”133 Though
consistent with previous evaluations, the Pennsylvania finding attracted criticism from a variety
of sources. Merchants complained that the cost figures were too low because the study omitted
the costs incurred when EBT systems fail. Other interested parties like EBT vendors, meanwhile,
argued that the study was unfair because it was too small in scope and occurred too soon after
Pennsylvania implemented its statewide system.134
EBT’s Impact on Merchants’ Capital Costs
Besides affecting operating costs, EBT participation carries potential capital costs for merchants
since they need to obtain the necessary equipment to process EBT transactions. To prevent the
shifting of program costs to merchants from the government, federal regulations specify that
“authorized retailers shall not be required to pay costs essential and directly attributable to EBT
system operations.”135 Federal regulations also require states to provide free POS equipment
designed to process only EBT transactions to those authorized retailers who request it.
These regulations have allowed smaller retailers who never previously accepted electronic
payments of any kind to obtain the equipment needed to remain in FSP and encouraged them to
begin accepting commercial credit and debit card transactions.136 The USDA’s 1994 evaluation
of Maryland’s statewide EBT program found that many of the merchants who had never engaged
in electronic commerce prior to Maryland’s implementation of EBT either joined or planned to
join a commercial payment network.137 Accepting the free equipment may tie smaller stores,
particularly those in distressed communities, and their customers closer to the financial
mainstream.
The State of EBT 28
A negative aspect of this policy pertains to larger stores like supermarkets already equipped to
handle electronic payment. Since the free POS equipment provided is restricted for EBT
transactions and since the larger retailers wanted to accept other forms of electronic payment to
accommodate their non-food stamp customers, these retailers have opted to upgrade their
existing equipment at their own expense. Even stores with free equipment have purchased
additional machines in order to serve food stamp customers at every counter. Since POS
terminals cost around $450 to $500 per unit, converting to EBT represents a potentially
significant expense for retailers.138 This has led some merchants and industry groups to argue
that states implementing EBT have violated federal regulations and shifted essential EBT costs
to merchants.
Future Capital Costs Associated with EBT
The main capital cost incurred by merchants under EBT, then, has been the expense of upgrading
existing electronic payment systems or investing in new equipment. A potentially significant
future cost involves the purchase of equipment that automatically classifies food items as food
stamp eligible or ineligible. As mentioned earlier, food stamps may be used only to purchase
certain goods, and traditionally it has been the responsibility of cashiers to sort purchases into the
appropriate categories. In a further attempt to reduce food stamp fraud, PRWORA contains a
clause that requires food stamp retailers to deploy, to the extent possible, electronic systems that
differentiate between FSP eligible and ineligible items.139
Complying with this mandate―which would require merchants to integrate their cash registers,
optical scanning equipment, and POS equipment―is technologically feasible for many retailers,
especially supermarkets, but is potentially expensive. One study estimated a national
implementation cost at $4.6 billion,140 and it is unclear who would pay this cost―government,
private industry, or both―and if the strategy is cost justified since there remain ways in which
the technology could be manipulated to allow fraud.
Merchant Costs for Non-Food Stamp Benefits
EBT also may have influenced the costs associated with non-food stamp benefits like TANF.
The USDA’s 1994 evaluation of Maryland’s EBT program argued that providing customers with
access to non-food stamp benefits is a voluntary action on the part of merchants and would only
be undertaken if the benefits exceeded the costs. While merchants incur costs by providing
access to non-food stamp benefits, it is assumed that merchants benefit since recipients will use
part of the benefits to purchase non-FSP goods.141 Furthermore, many states allow merchants to
levy surcharges on non-food stamp benefit transactions, and these fees represent a revenue
stream.
Concluding Observations on System Costs
Even if EBT has increased the capital and operating costs borne by merchants, there are few
available responses. While participation in EBT is voluntary under USDA regulations, merchants
need to adopt EBT or risk being shut out of the lucrative food stamp market. The government
decision to deliver all food stamp benefits electronically essentially has required merchants to
embrace the technology and costs associated with the governmental rules and regulations
implementing the technology―or risk losing sales and customers.
The State of EBT 29
Concern# 2: Government Reimbursements
When merchants who have not requested government-issued POS terminals process EBT
transactions through their private equipment, they must pay a transaction fee to the commercial
network that processes the transaction. Such fees also apply to regular credit or debit card
transactions. In the context of food stamps, these transaction fees represent a new cost to
merchants since they did not incur them under the paper system. These fees vary with transaction
volumes and range from $0.02 to $0.20.142 Many merchants have argued that the government
should reimburse them for these fees for three reasons.
First, as just stated, merchants did not pay the fees prior to EBT and contend they improperly
have to pay costs essential to the FSP, a violation of federal regulations. Second, merchants note
that their decisions to process EBT through private rather than government-purchased equipment
often translates into savings for the state since the state does not have to provide free POS
equipment. Third, USDA regulations specify that “the state agency may, with USDA approval,
share appropriate costs with retailers if the equipment is also utilized for commercial
purposes.”143
In principle, reimbursements are supposed to compensate merchants for the average transaction
fee paid to the commercial processor. Among the states that provide reimbursements, the
payments range from $0.01 to $0.08 per transaction.144 The size of the reimbursement has been
debated in many states, and merchants often demand a higher fee, as happened in Nebraska
where merchants asked for $0.14 per transaction before ultimately receiving $0.05.145
Meanwhile, opponents of the reimbursements charge that reimbursements are a way for
merchants to tap the public coffers. After all, merchants do not complain about paying the fees
on credit or debit card payments made by wealthier customers, so why should customers who
receive government benefits be treated differently?
Concern #3: Technological Reliability
A third merchant concern, which has been an issue since the first EBT pilot in Reading, involves
EBT’s technological reliability.146 As mentioned earlier, system failures impact both benefit
recipients and merchants. Recipients may be unable to purchase goods during system failures,
and merchants may lose sales. Merchants therefore have an interest in ensuring that system
failures seldom occur, but some research has questioned EBT’s technological reliability. One
study conducted by the Food Marketing Institute found that EBT outages occurred an average of
once every three days during the summer of 2000.147 Improving the reliability of EBT has
become a significant concern for merchants, and many trade associations have advocated
specific plans for improving the system.
Currently, merchants, including the Food Marketing Institute, are advocating for the inclusion in
EBT of a “store-and-forward” process similar to the one commercial credit card companies use
when their systems fail.148 Instead of depending on the manual voucher process described earlier,
merchants would like EBT systems to incorporate a limited type of technological IOU that
permits them to make an electronic sale and then settle the transaction after the computer
network has been repaired.149 If it turns out that the benefit recipient has exceeded the amount of
available benefits, merchants also want the ability to collect whatever benefits are available
instead of losing the entire sale, as currently happens.150
The State of EBT 30
Concern #4: Interoperability: A Merchant’s Perspective
Though the 1996 welfare reform legislation required states to develop EBT systems by October
1, 2002, it did not require them to use a particular technology. States were free to develop
systems as they saw fit, resulting in systems that were sometimes incompatible. For example,
most states developed on-line EBT systems, but Ohio and Wyoming implemented off-line
technology. Just as this development would have deprived benefit recipients of the ability to use
their benefits anywhere in the country, it also would have prevented merchants from selling
goods to certain customers. This would have been particularly burdensome for merchants serving
market areas transcending state borders and for larger chains that would have had to purchase
different EBT equipment in each state where they operated.
Advocates for merchants and recipients realized this potential problem quickly and advocated for
government action. One early response was for individual states to achieve interoperability by
deploying EBT equipment on both sides of a border. For instance, Ohio allowed merchants on
the Indiana side of the border to participate in Ohio’s EBT system. Ohio pursued this strategy to
ensure that recipients living near the border would retain access to FSP retailers.151
A second, more complicated response to the issue of interoperability involved states voluntarily
developing and adhering to the QUEST protocol, discussed earlier. While QUEST’s growth
limited the problem of interoperability among the 31 participating states, merchants remained
concerned about the lack of a single national EBT standard. Since participation in QUEST was
voluntary, it remained possible for states to develop different EBT standards, thereby requiring
merchants to invest in different kinds of POS equipment in each market. Merchants and their
trade associations consequently continued to lobby for a single EBT standard that would
guarantee national interoperability.
This goal was achieved in the form of the Electronic Benefit Transfer Interoperability and
Portability Act of 2000. The law requires states to develop interoperable EBT systems by
October 1, 2002, though four states were exempted.152 To further help merchants, the law
prevented states from shifting the compliance costs to authorized food stamp retailers, though
states with existing EBT systems that were not interoperable would have to invest in system
upgrades. To aid these states, Congress agreed to pay 100 percent of the conversion costs,
provided the total amount spent on helping all of the states in a given year does not exceed
$500,000. Moreover, the act also prevented states from placing limits on the geographic areas
where recipients could use their benefits. From the merchants’ perspective, this legislation has
resolved the matter of interoperability.
Concern #5: Cash Flow
In states where benefits in addition to food stamps are delivered through EBT, recipients
typically have the ability to request part of their cash benefits from food store cashiers, though
many states permit merchants to charge for this service. While larger merchants generally have
adequate cash flow to provide cash back, smaller merchants or merchants in areas with high
concentrations of benefit recipients may not have enough cash to meet the demand. These
merchants may respond by refusing to provide cash back, which not only prevents recipients
from accessing their welfare benefits, but also may cause merchants to lose out on sales if
The State of EBT 31
recipients had planned to use the cash to purchase items like toiletries that cannot be brought
with food stamps.
Merchants and Banks
Financial institutions like banks also have benefited from EBT. Under the system of paper food
stamps, banks grudgingly accepted food stamp deposits from merchants. The banks then counted
and stored the food stamps and ultimately sent them to a Federal Reserve Bank for redemption.
Under EBT, merchants handle their food stamp deposits electronically through the automated
clearinghouse system, and banks no longer need to accept grocer coupon deposits. Processing
food stamps electronically has allowed banks to eliminate the costs associated with handling
food stamps without having to stop accepting food stamp deposits.153
Expansion of EBT
By October 1, 2002, EBT systems are supposed to be implemented in all 50 states, the District of
Columbia, and Puerto Rico. These systems will be used to deliver food stamp benefits, and states
will have the option to use EBT to deliver non-food stamp benefits. Moreover, the supporting
electronic infrastructure could be modified and expanded to deliver additional federal and state
welfare benefits. One program suited for a national expansion of EBT is the Special
Supplemental Nutrition Program for Women, Infants, and Children (WIC), though there are
issues involved in such an expansion. The next section will discuss those issues, and the
following sections in turn will discuss expansion of state programs and attempts to increase
EBT’s effectiveness in countering fraud.
National Expansion to WIC
Like food stamps, WIC is a federal program administered by the FNS, but it is a grant, not an
entitlement, program. Eligible low-income pregnant and postpartum women, infants, and
children (up to age five) at nutritional risk receive vouchers that may be used to purchase a
certain basket of approved nutritious foods at authorized retailers.154 During federal fiscal year
1999, $3.9 billion in federal money was used to serve an average of 7.4 million participants per
month.155
Expanding EBT to WIC is a logical step since the program resembles food stamps. WIC and FSP
provide food benefits, and many clients participate in both programs. EBT consequently could be
used to reduce WIC’s operating costs and fraud losses and produce many of the same benefits
associated with electronic food stamps. Using EBT to deliver WIC also could help more eligible
citizens receive benefits. Since WIC is a grant program, it operates on a fixed budget and not all
eligible citizens receive aid. Every dollar saved in administrative costs therefore represents a
dollar that could be used to help people.
As of the summer of 2001, seven WIC initiatives involving 14 states were underway. As with
their electronic food stamp programs, states are procuring WIC EBT services through stand-alone
or joint procurements. Table 5 summarizes the status in each state.
The State of EBT 32
Based on planning
documents and pilot
programs, it is apparent
that electronic WIC
will differ in several
ways from electronic
food stamps.156 The
main difference will be
the use of hybrid
technologies that meld
on-line and off-line EBT. WIC lends itself to an approach that blends the two, and 11 of the 14
states planning or experimenting with WIC are pursuing this option. On-line technology can be
used for the purchase of food at stores, and the off-line component permits the storage of
individualized health and immunization records (which are part of the WIC program) directly on
a person’s benefit card. A disadvantage of delivering WIC through a hybrid technology is that it
requires states to create the appropriate infrastructure. Most have on-line EBT systems in place,
and the use of new technologies would require purchase of new equipment. This would result in
an additional EBT cost, which likely would become a contentious issue between the states and
merchants.
A second difference between food stamps EBT and WIC EBT is that new system vendors have
participated in the various WIC pilots. CSI holds the contract in Michigan, but Stored Value
Systems, a new contender in the EBT market, has become active in several states. Additionally,
some states are trying to avoid hiring prime contractors from the private sector. Wyoming is
serving as its own prime contractor, while Texas and New Mexico are planning to do the same in
their joint procurement.
State Program Expansion
Once a statewide EBT system is constructed, states can choose to deliver other benefits in
addition to food stamps. Public childcare subsidies may be delivered through EBT in a manner
that reduces the administrative costs associated with the paper-based systems, thereby freeing up
funds that could be used to meet the growing demand for subsidized childcare or to increase
reimbursement rates. In the process, childcare providers would be able to receive payments
faster. Oklahoma, for example, is operating a pilot EBT childcare program in Comanche County
that has reduced reimbursement time from six weeks to one week.157 The state, which plans to
expand the initiative statewide during 2002, hopes the system will lower administrative costs,
reduce fraud, and encourage more providers to participate in subsidized childcare programs.
When it is fully implemented, Oklahoma will provide electronic childcare benefits to
approximately 49,000 children enrolled in childcare programs.158
Technologically, an EBT childcare program could operate by installing POS machines at
childcare provider locations. Benefits could be delivered through the same benefit card used for
food stamps. Parents would swipe their card when they dropped their children off and again
when they retrieved them.159 Such automation could reduce the time parents, providers, and state
agencies devote to completing and reviewing attendance, reporting, and tracking forms.
Additionally, states would be better able to monitor whether parents are bringing their children to
Table 5: Status of Electronic WIC Initiatives (USDA)
Region State Procurement
Type
Status
Northeast CT, ME, MA,
NH, RI, VT
Joint Planning stage
Mid-Atlantic NJ Stand-alone Planning stage
Midwest MI, OH Stand-alone Pilots running
Southwest NM, TX Joint Pilot running
West NV, ND, WY Joint Pilot running
The State of EBT 33
childcare and if childcare centers are serving only the number of children authorized by their
licenses, thereby better ensuring that children are receiving adequate care. Of course, privacy
concerns could arise, depending on how this information is used.
Another concern pertains to the price the state pays to the EBT vendor. ACS receives $5.24 per
participating child per month in Oklahoma, the only state currently experimenting with EBT for
subsidized childcare payments.160 That price is significantly higher than the typical CPCM for
food stamps EBT, but it may drop as more children and providers are brought into the program.
Other states have expressed interest in expanding EBT in this way, which demonstrates the
potential that the technology has for delivering all forms of social welfare benefits in an
integrated manner.
Strengthening EBT’s Ability to Deter Fraud
EBT provides states with a potentially effective way of addressing food stamp fraud. Few states,
however, are taking advantage of that potential. GAO has found that only five states with
statewide EBT programs―Florida, Missouri, South Carolina, Texas, and Maryland―use EBT to
detect fraud among benefit recipients, and those five states accounted for 99 percent of the
individual traffickers caught nationwide between federal fiscal years 1998 and 1999.161 States
like Florida and Texas use EBT transaction records to identify stores likely to be engaging in
trafficking and then identify the individuals likely to traffic benefits who frequent the stores.
While identifying stores first and benefit recipients second is similar to the traditional method
used by FNS, EBT allows states like Florida and Texas to develop much more comprehensive
lists of potential traffickers.162 Meanwhile, other states like Missouri use EBT records to analyze
all benefit recipients, not merely those who shop at certain stores. Maryland exemplifies a third
strategy and partners with the FNS to identify potential malefactors. The Office of the Inspector
General (OIG) analyzes Maryland’s EBT records, identifies potential traffickers, and refers those
names to the state for investigation.163
If EBT is to help states reduce fraud within the FSP, FNS needs to encourage states to use it.
This is difficult since FNS has had to struggle with management practices and systems that have
prevented it from responding to fraud. For example, much of the data FNS has is outdated, and
different regional offices follow different procedures for investigating fraud. Communication
between FNS and the states also has been problematic.164 FNS recently has attempted to improve
its performance by encouraging its regional offices to develop consistent policies and to
collaborate with states to deter fraud.165 Also, since investigating fraud carries a high financial
cost for states, FNS in the past has proposed allowing states to keep a percentage of any benefits
recovered from traffickers, though opinion is divided regarding whether those amounts would
cover the expenses involved with investigating fraud.166 Consequently, this incentive has not yet
been implemented.
One way to enhance EBT’s fraud fighting ability would be through the use of biometrics. Using
such technologies as fingerprinting, hand geometry, retina scan, voice verification, and signature
verification could prevent fraud by ensuring that the person accessing benefits at an ATM or
POS machine is the actual person entitled to those benefits.167 GAO has recommended
fingerprinting as the most effective method for countering fraud in EBT programs, and some
states have experimented with that technology.168
The State of EBT 34
As of spring 2002, Arizona, Texas, and Los Angeles County, California, all require benefit
recipients to provide finger images when they apply for benefits. The fingerprints are then cross-referenced
against a database to see if the applicant already is receiving benefits under a different
name. A 1994 pilot program in Los Angeles County that incorporated finger imaging into the
application process for General Relief produced estimated savings of $5.4 million.169 It is
important to note that technologies like finger imaging so far have been used only when people
enroll for benefits, not when they make transactions at POS or ATM terminals.
Texas was the first state in the nation to require finger imaging of food stamp recipients for
program enrollment, in 1996. As of 2001, the state had created a database containing the
fingerprints of 1.2 million clients and had saved $6 million to $11 million in duplicate benefit
issues.170 The state at one point hoped to broaden its program to include POS machines. So,
instead of keying a PIN at a POS terminal to access benefits, a benefit recipient would place one
finger on a special pad that would scan the image, cross-reference it, and authorize
transactions.171 While the expansion never occurred, the debate raised two general objections to
the use of biometrics.
First, critics claimed that biometrics invade the privacy of benefit recipients by creating a
governmental database of personal biological information like fingerprints and retinal images.
Second, any widespread expansion of biometrics would increase EBT’s costs since equipment
like fingerprint readers would need to be installed at ATM and POS machines. Hypercom, a
Phoenix-based firm, recently developed a fingerprint scanner that connects to POS terminals and
costs $120 per unit to install, but installing such devices at every POS terminal in a state would
require a significant expenditure.172
Another problem with biometrics is that some states have begun to doubt its cost effectiveness.
In 2001 Missouri’s state auditor actually recommended removing biometrics from the state’s
EBT program.173 Missouri had been placing photographs of benefit recipients on their EBT
cards, but the state auditor concluded that the photographs were an ineffective way of countering
fraud. Since federal regulations allow family members to use the recipients’ cards, merchants
were ignoring the photographs and allowing anyone with a card and valid PIN to purchase food.
This finding may be generalizable to other states that place photographs on EBT cards.174
Lessons Learned from the EBT Experience
Almost 20 years have passed since the USDA established the first EBT pilot in Reading,
Pennsylvania. Most states have EBT systems in place, and the remainder must develop systems
by October 1, 2002. However, it appears that seven states―California, West Virginia, the Virgin
Islands, Guam, Delaware, Iowa, and Maine―will miss the deadline. Of the states that have
implemented EBT, many have moved beyond the congressional mandate to provide electronic
food stamps and are delivering non-food stamp benefits like TANF as well. Additionally, a
national expansion to WIC appears likely. In spite of this growth, EBT’s development has not
been devoid of problems. When taken together, EBT’s development, growth, and problems teach
three lessons that policymakers should consider when developing technological delivery
mechanisms for social welfare benefits.
The State of EBT 35
First, the EBT experience illustrates the danger of assuming that technological solutions
automatically lower costs. Though EBT gained prominence in the 1990s as a result of the
National Performance Review, the Federal Electronics Benefit Transfer Task Force, and
PRWORA, it was not a new or untested concept. A body of evaluation literature existed as a
result of earlier pilot programs in Pennsylvania (Reading), New Mexico (Albuquerque),
Minnesota (Ramsey County), and Maryland, and these studies indicated that EBT was not
necessarily an improvement over the status quo. In fact, the Maryland study revealed that EBT
increased the administrative costs of non-food stamp programs like TANF and was cost-competitive
with paper food stamps. Evaluations also indicated that benefit recipients and
merchants, though supportive of EBT, incurred costs due to the technology. In spite of the
available evidence, it still was assumed that electronic benefits automatically would be cheaper
than paper. EBT therefore teaches that when evaluating technological tools, decision makers
need to view that technology as a potential improvement to a process rather than as an automatic
improvement.175
Second, EBT demonstrates the unintended consequences that may result when one stakeholder’s
interests are elevated over those of others. The EBT story suggests that the federal government
elevated its interests over those of the states, merchants, and benefit recipients. The government
hoped to save money in the short term. To ensure that outcome, the government used its rule-making
powers to require cost neutrality. When coupled with changes in EBT’s economics, cost
neutrality regulations increased EBT’s costs to the states, which in turn shifted costs to benefit
recipients and merchants. EBT therefore may not have benefited all food stamp stakeholders.
The federal government may have saved money, or at least maintained a certain level of
expenditure, but it redistributed costs among other stakeholders.
Third, EBT illustrates the problems with implementing technology in a decentralized way. While
PRWORA required states to implement EBT for food stamps, the act provided states with the
flexibility to develop systems as they saw fit. Yet, the FSP is a national program that transcends
state lines since benefits are intended to be portable. By implementing EBT in a decentralized
fashion, Congress created a situation where states could have technologically incompatible
systems, resulting in food stamp benefits that would not be portable. As discussed earlier, EBT
interoperability and portability were key concerns for both merchants and benefit recipients.
Though Congress responded by passing the Electronic Benefits Transfer Interoperability and
Portability Act, this issue shows the difficulties that result from implementing a national program
in a decentralized way.
The Short-Term Challenges
EBT is here to stay, and states have invested in the technology to comply with the federal
mandate. As time passes, states may be able to grow EBT into a system that can deliver myriad
social welfare programs in a manner that saves money and provides better services. Before that
happens, however, states and the federal government need to address the economic issues
involved in EBT, including the market’s competitive dynamic.
The State of EBT 36
Addressing this situation is important since EBT contracts in 25 of the 41 statewide programs
expire between 2002 and 2003 (see Table 6). These expirations will raise a number of issues.
Having gained experience with EBT systems, renewing states have a better grasp of the services
they want to provide. However, the market is dominated by CSI, which serves as the prime
contractor in 75 percent of the states with statewide programs and as a subcontractor in others.176
It therefore is unclear whether states will be able to negotiate for the services and costs they
desire or whether they will have to accept CSI’s terms. When coupled with EBT’s fluid
economic condition, states may encounter higher costs.
Based on the experiences of the seven states that already have issued at least their second request
for proposal (RFP) for EBT contracts, price increases appear likely. For example, New Jersey’s
second contract with e-Funds differs from the first by requiring interoperability and limiting the
number of free ATM transactions, but it also raised the CPCM.177 Similarly, when South
Carolina negotiated a second contract with CSI, the new contract specified system
interoperability but doubled the CPCM.178
Coping with EBT’s Competitive Dynamic
A key reason for these price increases has been the change in EBT’s competitive dynamic. The
combination of declining caseloads, government regulations, poor financial forecasting, and the
aggressive pursuit of business by one vendor has turned EBT into a market with diminished
competition. CSI is the industry leader and enjoys the experience and advantages that accompany
that position, but ACS’s recent acquisition of Lockheed Martin IMS and Montana’s recent
decision to award its EBT contract to TRW suggest renewed competition in the EBT market,
though it is too soon to know.179 Unless the competitive dynamic of the EBT market changes, all
states rebidding their EBT contracts may find themselves facing higher prices. States have three
choices for dealing with these higher prices.
First, states simply could accept the higher prices provided by the market, abandoning the goal of
saving money through EBT and striving instead to minimize the amount of additional funds they
have to spend. One way to do this would be by shifting costs to benefit recipients and merchants.
The fees and surcharges that benefit recipients already pay in many states are a manifestation of
that approach. Of course, this results in the ironic situation where a technology intended to
reduce stakeholder costs requires them to spend more—which raises the question, If EBT
requires states to spend more on a technology that requires stakeholders to pay more, what is the
point of switching from paper to plastic?
Second, states could follow the lead of Texas and Wyoming and serve as their own prime
contractors. After Texas’s prime EBT contractor, Transactive, left the EBT market, the Lone Star
Technology Department of Texas’s Department of Human Services became the state’s prime
EBT contractor. The EBT system was then bid in three parts―central processing, retail
Table 6: Pending Contract Expirations
(Center for Community Capitalism)
Expiration Year State
2002 AL, DC, LA, MD, NJ, NM, OH, UT
2003 AR, CO, CT, GA, HI, ID, IL, KS, MA, MO, NH, NY, NC, OK, RI, VT, WA
The State of EBT 37
management, and customer service―that were awarded as subcontracts to three different
vendors.180 Such a strategy may benefit states in several ways. Not only does the state retain
direct control over its EBT system and the ability to develop the system as it sees fit, but this
strategy may foster increased competition among EBT vendors. While few firms have the ability
to serve as prime contractors, many firms have the technological resources needed to provide
system components. The Center for Community Capitalism’s survey of state EBT experiences
illustrates this fact: While only CSI, e-Funds, and ACS/Lockheed have served as prime
contractors, 11 other firms currently serve as subcontractors in various states. A further
advantage of the Texas model is that it can be employed in a coalition system and thereby help
states achieve economies of scale. A disadvantage of this approach, however, is that it requires
states to have the resources and abilities needed to manage the EBT and keep up with the
constant changes in electronic payment technology.181
One state attempting to follow the lead of Texas and Wyoming is Louisiana, which is selecting a
vendor for its next generation of EBT. The Department of Social Services requested proposals
both for a total EBT system and for the three constituent system parts―central processing
services, call center services, and retailer management services. Depending on the bids it
receives, Louisiana may pursue a total system developed by one vendor or select a different
vendor for each system part, as have Texas and Wyoming.182
Third, states could stop using EBT to administer non-food stamp benefits, since various
evaluations have indicated that EBT reduces the costs of food stamps but increases the costs of
delivering non-food stamp benefits. One possibility would be to deliver non-food stamp benefits
through EFT. Not only is EFT extremely cost effective, it also represents a way of connecting
benefit recipients to the banking system. Moreover, EFT would eliminate many of the consumer
issues raised earlier since having a bank account renders the vendor fee and surcharge issue
moot, provides people with Regulation E protections, affords a higher level of privacy than EBT,
and does not involve the issue of interoperability. A drawback to this option is that banks may be
unsupportive of a program that requires many low-balance, high-volume bank accounts.183
Dealing with Cost Neutrality – (SECTION NEEDS TO BE RE-WORKED)
A factor complicating state responses to higher prices is the federal cost neutrality requirement,
a cornerstone of federal EBT policy. That requirement originated in 1993 during the planning
stage of Maryland’s EBT program. To avoid higher costs, the federal Department of Health and
Human Services insisted on cost neutrality provisions, which eventually became part of the
regulations that governed EBT’s national expansion. Yet, while cost neutrality may be beneficial
to the federal government, the policy may hurt the states and curtail EBT’s development in
several ways. The Federal Electronic Benefits Transfer Task Force, an outgrowth of the
National Performance Review, elaborated on the problems that cost neutrality could cause in its
1994 EBT implementation report. The task force recognized that the cost-neutrality standard
would penalize “states that have kept costs down the most―even when the shift to EBT would be
cost-beneficial in the long run.”184 In other words, cost neutrality would mean that states with
inexpensive and efficient paper programs would not receive enough federal funding to manage
the switch to the more expensive EBT program, and such states would expend more state
resources on EBT.
The State of EBT 38
to the realization that cost neutrality would create a financial burden for states, the task force
argued that replacing cost neutrality with “a government-wide, multi-program ‘cost-effectiveness’
standard would recognize the interagency, multi-state, and multi-year aspects of
the EBT effort.”185 The task force’s recommendation was not adopted, and, as a result,
states―particularly states that were operating efficient food stamp programs―were reluctant to
adopt EBT because of the potentially higher costs. Maine, for example, traditionally has operated
one of the most efficient paper food stamp systems in the country, and the move to EBT is
expected to increase its food stamp costs by $550,000 per year.186 Maine consequently has
moved slowly on EBT and will miss the October 1, 2002, implementation deadline.
State responses to the cost-neutrality requirement are limited since it is a federal regulation that
states cannot directly change. However, states should attempt to understand the impact that the
requirement is having on their EBT programs and attempt to persuade federal decision makers to
change the regulations.
Adapting to Changes in Pricing Structures
Even if new competitors enter the market, federal cost-neutrality requirements and shifts in the
EBT market make it likely that states will pay more for EBT when they renew their contracts.
This is because vendors have not liked the returns they have earned on their EBT contracts and
will want to maximize their profits. Vendors may try to shift EBT pricing away from the CPCM
model toward one of four main alternatives: a fee-for-service model, a tiered-pricing model, a
caseload floor model, or some combination of models.187 The possibility of new pricing
structures means that states should be aware of the advantages and disadvantages of each.
Fee-for-Service Model
Under this pricing plan, a state would pay the vendor a fixed fee for every EBT service provided:
a set amount for every call that benefit recipients place to the help line and every POS terminal
provided to merchants. This model essentially shifts risks from the vendor to the state. Since
vendors receive a fee for every service, they are immune to changes in the food stamp caseload,
which may make the EBT market more appealing for vendors, especially if they find the current
environment so risky that they refuse to participate. This theoretically could attract more
competitors to the market. Meanwhile, states will save or lose money depending on the direction
the caseload moves. The volatile nature of the food stamp caseload, at least in recent years,
would render it difficult for states to develop accurate budget projections for EBT services. In
addition, the fee-for-service model may impact the quality of EBT services provided by the
vendor. Since vendors receive a payment for every service provided, they are rewarded, not
penalized, for poor performance. For instance, if ineffective customer service requires a benefit
recipient to call the help desk three times to resolve a problem, the vendor receives three fees.188
Tiered Pricing
Under a tiered system, the CPCM changes with caseload levels. Higher levels translate into a
lower CPCM, while lower levels result in a higher price. The chief advantage of the model is that
it better protects vendors from risk and allows states to realize economies of scale. However,
tiered pricing already has been attempted in EBT contracts with little success. One problem with
tiered pricing is that vendors have been unsure how to divide caseloads accurately into tiers and
assign an appropriate price to each level. A second problem is that it is difficult to develop tiers
The State of EBT 39
within joint procurements since different member states have different caseloads. New York and
Rhode Island, for example, are both members of NCS, but they have vastly different caseloads.
The question is, Should these states pay the same rate or should New York receive a lower rate
than Rhode Island?189
Caseload Floors
This pricing model represents another method of mitigating EBT’s risk to vendors. Under the
model, states guarantee vendors a minimum revenue level, regardless of the actual caseload
levels. While this model is appealing to vendors, there exists little incentive for states to endorse
it since states will not receive any cost savings if caseloads fall.190
Combined Model
This model permits states and vendors to negotiate agreements that contain elements of the
existing CPCM model and the three alternatives mentioned above. For example, the state and
vendor could agree to a contract that combines a CPCM with tiered pricing. The two parties also
could negotiate different pricing elements for each EBT service like customer service or
transaction processing services. Because of the flexible nature of a combined model, its
advantages and disadvantages would need to be evaluated on a case-by-case basis.191
Alabama, which in late 2001 was involved in the bidding process for its next generation of EBT,
is attempting to create a hybrid model combining CPCM, tiered pricing, and a caseload floor.
The CPCM paid by the state will vary depending on which tier the caseload level falls in, but
these tiers have been drawn more narrowly than in the past. Additionally, the state guarantees a
caseload floor. If the caseload falls below the range contained in the lowest tier, the contractor
will receive the CPCM specified in the lowest tier. There also is a caseload ceiling―that is, if the
caseload exceeds the highest tier, the state would pay the CPCM specified in the highest tier.192
Since Alabama currently is negotiating the contract, it is too early to know if this hybrid model
will represent an improvement in the pricing of EBT services.
Choosing between On-Line and Off-Line Technologies
Another challenge for states is deciding whether to adopt off-line technology. From a
technological standpoint, off-line technology offers two advantages over on-line technology.
First, the embedded microchip allows off-line cards to hold considerably more information than
on-line cards. This capacity may expedite transactions, particularly internet-based ones since the
chips can store electronic signatures,193 thereby eliminating the need for customers to wait for
and sign paper receipts generated at the register. Second, off-line cards are harder to counterfeit
than on-line ones, reducing the possibility of fraud.194
Unfortunately, off-line technology carries several disadvantages. Chief among these is cost.
While an on-line card costs $0.25 to manufacture, an off-line card’s price ranges from $3.00 to
$10.00.195 Another significant concern is that the existing commercial payment environment is
not designed for off-line cards. Most POS readers located in retail establishments are designed
for on-line cards and are incapable of accessing the information stored on an off-line card’s
microchip.196 Nevertheless, credit card companies, retailers, and the government have shown a
growing interest in off-line technology. Credit card companies like American Express have
introduced or plan to introduce off-line cards, while Target, a national retail chain, has begun
The State of EBT 40
installing off-line technologies in its stores. Most interestingly, the Department of Defense has
begun issuing off-line cards to 4.3 million uniformed and civilian employees,197 which may
speed the technology’s growth and acceptance.
USDA began experimenting with off-line EBT technology to deliver social benefits in 1990.
That year, the FNS sponsored a pilot program in Dayton, Ohio, that delivered food stamps
electronically. In 1994 this program was expanded throughout the state of Ohio. Meanwhile, a
second pilot occurred beginning in 1993 in Wyoming. That project used EBT to deliver both
food stamp and WIC benefits. Evaluations of the various pilot programs revealed that off-line
technology was a reliable method for delivering benefits, especially for WIC. Off-line
technology lends itself to WIC because the detailed health and immunization records that are part
of the program can be stored directly on the smart cards. However, the evaluations found that
off-line technologies are more expensive to implement and administer than on-line EBT systems.
Costs are expected to fall if more states adopt the technology.198 However, this seems unlikely,
since most states already have developed on-line systems and it seems implausible that they
would switch technologies after having invested so recently in on-line systems―especially since
the on-line platform remains the technological standard in most retail environments.
Conclusion
The EBT story and its lessons enrich the public policy process by demonstrating the strengths
and weaknesses of a technological attempt to reduce the fraud losses and administrative costs of
social welfare programs. These lessons are offered to help policymakers and public
administrators improve the existing EBT program as it transitions into its next generation.
The State of EBT 41
Appendix A: List of Acronyms
ACH Automated Clearinghouse Network
ACS Affiliated Computer Services, Inc.
AFDC Aid to Families with Dependent Children
ARU Audio Response Units
ATM automated teller machine
CPCM cost per case month
CSI Citicorp Services, Inc.
DHHS U.S. Department of Health and Human Services
EBT electronic benefits transfer
EBTSAG EBT Single Administrative Grant
EFT Electronic Funds Transfer
EFTA Electronic Funds Transfer Association (EFTA),
FNS Food and Nutrition Service
FSP Food Stamp Program
GAO General Accounting Office
NCS Northeast Coalition of States
OIG Office of the Inspector General
PIN personal identification number
POS point of sale
PRWORA Personal Responsibility and Work Opportunity Reconciliation Act
SSI Supplemental Security Insurance
TANF Temporary Aid to Needy Families
USDA U. S. Department of Agriculture
WIC Women, Infants, and Children
SAS Southern Alliance of States
WSEA Western States EBT Alliance
The State of EBT 42
1 Office of Analysis and Evaluation, Food and Nutrition Service, U.S. Department of Agriculture, The Evaluation of
the Expanded EBT Demonstration in Maryland, Vol. 1 Abt Associates, 1994, 1.
2 “Electronic Benefit Transfer (EBT) Provisions of Personal Responsibility and Work Opportunity Reconciliation
Act, Proposed Rule,” Federal Register 56 (May 27, 1999): 28763–28768.
3 Joseph Radigan, “EBT Rules Cause a Stir,” US Banker (July 1997): 75.
4 General Accounting Office, Food Stamp Program: Implementation of Electronic Benefit Transfer Systems, GAO-
02-332, 1. 2002. ALSO SEE COMMENTS ON OTHER GAO ENTRIES.
5 David B. Humphrey, “The Economics of Electronic Benefit Payments,” Economic Quarterly 82:2 (1996).
6 David Barstow, “Welfare Debit Cards Offer Benefits and Some Snags,” New York Times, June 18, 1999, New
York City edition.
7 General Accounting Office, 9.
8 Data taken from Center for Community Capitalism, The University of North Carolina at Chapel Hill, Survey of
State EBT Programs (2001).
9 Michael A. Stegman, Savings for the Poor: The Hidden Benefits of Electronic Banking (Washington, D.C.:
Brookings Institute Press, 1999), 7.
10 Stegman, 9.
11 Center for Community Capitalism, 33.
12 Center for Community Capitalism, 44.
13 Center for Community Capitalism, 111.
14 Center for Community Capitalism, 39.
15 U.S. Department of Agriculture, Food Stamp Program Participation and Costs, USDA home page, accessed on
March 25, 2002, <http://www.fns.usda.gov/pd/fssummary.htm>.
16 Brian Kibble-Smith, “Citibank Profitably Pioneers Electronic Benefit Transfer Programs,” Journal of Retail
Banking Services 19:4 (1997): 3.
17 General Accounting Office, Welfare Reform: Data Available to Assess TANF’s Progress, GAO-01-298, 1, 6.
DATE? SEE OTHER GAO ENTRIES BELOW
18 Office of Analysis and Evaluation, 19-–20.
19 Office of Analysis and Evaluation, 22–25, 28.
20 Office of Analysis and Evaluation, 19.
21 John Kirlin, Seth Cooper, Sandra Nolden, and Christopher Logan, Evaluation of the Expanded Off-Line EBT
System in Ohio: Moving to a Statewide EBT System Using Smart Cards for Food Stamps (Abt Associates), March
1999, 8.
22 Kirlin et. al, 8.
23 John A. Kirlin, Charles R. King, Elizabeth E. Davis, Christopher Jones, and Gary Silverstein, The Feasibility of a
Nationwide Electronic Benefit Transfer System for the Food Stamp Program (Abt Associates), April 1990, vii–viii.
24 Food and Nutrition Service, U.S. Department of Agriculture, EBT Alternatives Analysis (Phoenix Maximus), 15.
25 Food and Nutrition Service, 24.
26 Food and Nutrition Service, 24–25.
27 Center for Community Capitalism, 35
28 Food and Nutrition Service, 26–27
29 Center for Community Capitalism, 169.
30 Center for Community Capitalism, 28, 34.
31 Food and Nutrition Service, 16–23.
32 Robert E. Robertson, Food Stamp Program: Program Integrity and Participation Challenges,GAO-01-881T
(Washington, D.C.: General Accounting Office), 9. CAN THIS PUBLICATION INFO BE USED IN GAO
CITATIONS ABOVE? ALSO, DATE?
33 Complaint

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Stegman, M., Quinterno, J., and Lobenhofer, J. (June 2002). “The State of Electronic Benefit Transfer (EBT).”
Center for Community Capitalism: Chapel Hill, NC.
The State of Electronic Benefit Transfer (EBT)
June 2002
John Quinterno, Jennifer S. Lobenhofer, and Michael A. Stegman
Center for Community Capitalism
The University of North Carolina at Chapel Hill
Working paper
The State of EBT 2
Table of Contents
Overview 5
The History of EBT 5
National Trends 6
Benefits Delivered via EBT 7
Direct Deposit and EBT 7
The Mechanics of EBT 8
Benefit Type #1: Food Stamps 8
Benefit Type #2: Non-Food Stamp Benefits 8
How EBT Delivers Food Stamp Benefits 9
How EBT Works to Deliver Non-Food Stamp Benefits 10
On-Line versus Off-Line EBT 10
EBT’S Design, Procurement Models, and Vendors 10
Procurement Models 11
Pricing Model 12
Market Evolution and Actors 12
Financial Impacts on the Federal Government and the States 13
Impact #1: Administrative Cost Reductions 13
Impact #2: Impact on Fraud 15
Illegal Trafficking of Food Stamp Benefits 15
Other Forms of Food Stamp Fraud and Non-Food Stamp Fraud 16
Consumer Effects 16
Overall Consumer Satisfaction with EBT 17
Issue #1: Vendor Fees and Surcharges 18
Issue #2: Recipient Training 20
Issue #3: Customer Service 20
Issue #4: Technological Reliability 21
Issue #5: Consumer Protection 22
Issue #6: Interoperability: A Recipient’s Perspective 23
Issue #7: Privacy 24
Issue #8: Card Replacement 25
Issue #9: Access to Farmers’ Markets 25
Merchant Concerns 26
Concern #1: System Costs 26
Concern# 2: Government Reimbursements 29
Concern #3: Technological Reliability 29
Concern #4: Interoperability: A Merchant’s Perspective 30
The State of EBT 3
Concern #5: Cash Flow 30
Merchants and Banks 31
Expansion of EBT 31
National Expansion to WIC 31
State Program Expansion 32
Strengthening EBT’S Ability to Deter Fraud 33
Lessons Learned from the EBT Experience 34
The Short-Term Challenges 35
Coping with EBT’S Competitive Dynamic 36
Dealing with Cost Neutrality 37
Adapting to Changes in Pricing Structures 38
Choosing Between On-Line and Off-Line Technologies 39
Conclusion 40
Appendix A: List of Acronyms 41
The State of EBT 4
List of Exhibits
Table 1: EBT Development Timeline 6
Table 2: EBT Status by State 6
Table 3: Procurement Method by State 11
Table 4: Prime Contractor by State 13
Table 5: Status of Electronic WIC Initiatives 32
Table 6: Pending Contract Expirations 36
Graph 1: Five Most Common EBT Benefits 7
Graph 2: Number of Free ATM Transactions 18
Graph 3: Fees for Additional EBT Transactions 18
Figure 1: Sample EBT Cards–Dakotas, Maryland, and Indiana 9
The State of EBT 5
Overview
The labels on automated teller (ATM) and point of sale (POS) machines typically list the
payment networks that customers may use to access cash or purchase goods at the terminal.
Cirrus and Plus are among the more common networks, but in recent years another network logo,
QUEST, has also begun appearing at machines across the country. While QUEST resembles the
other networks, it differs in a key way: Instead of providing individuals with access to their bank
accounts, QUEST allows qualifying individuals to access welfare benefits like food stamps and
Temporary Aid to Needy Families (TANF).
QUEST is part of an electronic benefits transfer (EBT) system, which itself belongs to a broader
movement toward using technology to deliver governmental benefits in a more cost-effective
manner. In spite of its popularity and cost-saving potential, EBT’s national effects on diverse
stakeholders, such as the federal government, state governments, benefit recipients, and
merchants remain unclear due to a lack of scholarly attention. This working paper attempts to
advance public understanding by using survey data, media reports, and government documents to
tell the EBT story―a story that has grown more intricate than anticipated. Critical chapters
include the technology’s history, mechanics, procurement, national use, financial impacts,
consumer effects, merchant effects, potential expansion, lessons learned, and short-term
challenges.
The History of EBT
Technological advances in the financial world have made conducting transactions through
electronic means like debit cards, cheaper and easier than transactions conducted through
physical ones like paper coupons. Cognizant of technology’s potential to lower the costs of
government programs, the Food and Nutrition Service (FNS), the branch of the U. S. Department
of Agriculture (USDA) responsible for the Food Stamp Program (FSP), initiated the nation’s first
EBT pilot project in 1983 in Reading, Pennsylvania (Table 1).1 While electronic food stamps
proved more expensive to operate than paper-based ones, the initiative’s popularity among
benefit recipients and merchants, coupled with its cost-saving potential, led FNS to initiate other
experiments, several of which involved delivering other social benefits electronically in an
attempt to share costs among programs.
The demonstration programs attracted increased political attention during the early 1990s, when
a policy environment desirous of “paperless” government emerged in Washington. Congress
endorsed EBT as an alternative to paper food stamps in 1990,2 and Vice President Al Gore’s
National Performance Review backed EBT and developed a national implementation plan.3
The most important step in EBT’s development came with the 1996 passage of the Personal
Responsibility and Work Opportunity Reconciliation Act (PRWORA). This congressional act
required states to deliver food stamps electronically by October 1, 2002.4 Members of both
parties viewed EBT as a way of reducing the FSP’s administrative costs and fraud losses. As an
example of EBT’s potential, a 1996 cost-benefit analysis predicted that it would produce annual
federal savings of $195 million by the year 2000.5
The State of EBT 6
Although PRWORA required states to develop EBT for food stamps, many states chose to
develop systems that would permit the delivery of additional federal and state social benefits.
Like the federal government, states hoped to save money through the lower costs theoretically
associated with electronic systems. Optimistic estimates surrounded the development of EBT
systems. New York, for instance, originally estimated that its combined food stamp and cash
benefit issuance costs would fall from $6 per month per client to $2.60.6 Other states projected
similar reductions. Since PRWORA’s passage, states have been implementing EBT systems to
meet the deadline.
National Trends
As of summer 2001, 39 states, the District of Columbia, and Puerto Rico (subsequently referred
to as 41 states) had active statewide EBT systems. The remaining states were experimenting with
pilot programs, negotiating contracts, or preparing to activate full systems. Table 2 summarizes
where each state stands. Most of the attention in this working paper will focus on those with
Table 1: EBT Development Timeline
Year Event
1983 USDA begins first EBT pilot program in Reading, Pennsylvania.
1988 EBT pilots begin in Albuquerque, New Mexico; Ramsey County,
Minnesota; and the Park Circle District of Baltimore, Maryland.
1990 Leland Domestic Hunger Relief Act amends Food Stamp Act of 1977 and
allows EBT as an alternative to paper food stamps.
FNS develops EBT regulations. The basic framework remains in effect.
1993 Maryland’s EBT program expands statewide, making it the first statewide
system in the country.
National Performance Review endorses EBT.
1994 Federal Electronic Benefits Transfer Task Force releases national EBT
implementation plan.
First off-line EBT pilot begins in Dayton, Ohio.
1996 Congress passes Personal Responsibility and Work Opportunity
Reconciliation Act, which mandates EBT for the Food Stamp Program.
2000 Congress passes EBT Interoperability and Portability Act.
2001 (Summer) 41 states have statewide EBT systems in place.
2002 (October) Deadline for states to implement EBT systems for the Food Stamp Program.
Table 2: EBT Status by State
Status State
Statewide Program Implemented AL, AK, AZ, AR, CO, CT, DC, FL, GA, HI,
ID, IL, KS, KY, LA, MD, MA, MI, MN, MO,
NH, NJ, NM, NY, NC, ND, OH, OK, OR, PA,
PR, RI, SC, SD, TN, TX, UT, VT, WA, WI,
WY
Pilot Programs Operating CA, IN, IA, VA
Negotiating Contracts DE, Guam, ME, MT, Virgin Islands, WV
Preparing to Go Active NE, NV
The State of EBT 7
Graph #1: Five Most Common EBT Benefits
(Center For Community Capitalism)
41
33
13
12
9
0 10 20 30 40 50
Food Stamps
TANF
State GA
Refugee Assistance
SSI
Benefit Type
Number of States
statewide programs already in place.
Benefits Delivered via EBT
States use EBT to deliver food stamp and non-food stamp benefits, though PRWORA only
requires them to provide electronic food stamps. All 41 states with statewide systems deliver
food stamps as required, and 80 percent of national FSP benefits now are delivered
electronically.7 Furthermore, 33 of the 41 states also deliver TANF benefits electronically. Other
popular benefits being delivered include general assistance benefits (13 states), refugee
assistance (12 states), and Supplemental Security Insurance (SSI) (9 states).8 Additionally, some
states are experimenting with delivering Women, Infants, and Children (WIC) benefits, child
support, health insurance, childcare payments, and welfare-to-work initiatives. Graph 1 shows
the frequency of offered benefits. Note that the typical state offers food stamps, TANF, and one
other benefit. Non-food stamp benefits like TANF normally are delivered through ATM or POS
machines, though some states experimenting with WIC benefits have been moving toward smart
cards.
Direct Deposit and EBT
As mentioned earlier, EBT is
an outgrowth of a broader
movement that seeks to use
technological advances in the
financial world to deliver
government benefits in a more
cost-effective way. A related
technology is Electronic Funds
Transfer (EFT), commonly
known as direct deposit,
through which recipients may
choose to have their
government benefits deposited
directly into a bank account.
The difference between EFT and EBT systems is that an individual must have a bank account in
order to use EFT, while EBT systems use bank structures like ATMs as conduits between benefit
recipients and a state-maintained account.9 Unlike EBT, EFT connects low-income people
directly to the financial mainstream.
Research suggests that bank accounts offer numerous benefits to low-income citizens. Opening
bank accounts allows people to save money, earn interest, build credit histories, and move
toward homeownership. Connecting low-income people to the banking system also provides
banks with the market information needed to develop products tailored to the needs of the newly
banked.10 Because of these advantages, many states have incorporated EFT options into their
EBT systems. EFT options exist within 18 EBT programs, though little is known about the usage
of this option. Forty-three percent of the states with EFT options are in the Northeast and
Midwest, and two states, Connecticut and Florida, have developed direct deposit options with
particularly innovative elements.
The State of EBT 8
Connecticut offers all recipients of cash assistance the option of establishing an EFT account that
allows four free ATM withdrawals a month. The state also offers an enhanced direct deposit
option that provides other features.11 Florida, meanwhile, has partnered with First Union Bank to
create a direct deposit account that allows three free transactions per month, unlimited deposits,
unrestricted POS access, privacy safeguards, one free replacement card per year, and a monthly
service fee capped at $3.12
In spite of its potential, EFT has not reached many of those who could benefit from the
establishment of bank accounts. Some states do not allow the option, while participating states
have encountered difficulties spreading the word. This may be due in part to the limited outreach
and training methods used in many states, but it also may be due to the fact that there is less of an
economic incentive for EBT vendors to promote direct deposit. Under many state EBT contracts,
vendors receive a lower fee for clients who receive cash benefits via direct deposit than for those
who receive benefits through EBT. Also, financial institutions have little incentive to encourage
the creation of low-balance, high-activity accounts.
Another form of EFT offered in some states is electronic bill payment. In New Hampshire,
recipients may authorize up to three free electronic fund transfers from their state-maintained
benefit account to vendors approved by the state.13 Connecticut offers a similar option, while in
the District of Columbia, benefit recipients have the option of paying their utility bills
electronically through POS machines installed in public housing complexes.14
The Mechanics of EBT
Though many states deliver multiple benefits through EBT systems, they only are required to
provide food stamps. Since EBT systems operate differently depending on the benefits being
delivered, an understanding of EBT requires basic familiarity with the two main benefit types:
food stamp and non-food stamp.
Benefit Type #1: Food Stamps
The FSP is a means-tested federal entitlement that helps low-income Americans buy food.
Qualifying individuals and families receive income supplements that may be used to purchase
nutritious food at authorized retail establishments. Seventeen million people received assistance
at a total cost to the federal government of approximately $17 billion during fiscal year 2000:
Approximately $15 billion in benefits, and $2 billion for the federal government’s half of the
administrative costs.15 Clearly, any technology capable of reducing costs could result in
tremendous savings.
Benefit Type #2: Non-Food Stamp Benefits
An array of social programs, ranging from TANF to home energy assistance, is delivered via
EBT. Some of these programs are funded and administered entirely by the federal government
(i.e., Supplemental Security Income or SSI), others are federally funded and state administered
(i.e., TANF), and still others are financed solely by states (i.e., General Assistance).16 For the
purpose of EBT, the most important non-food stamp benefit is TANF.
The State of EBT 9
Created in 1996 as part of PRWORA, TANF replaced Aid to Families with Dependent Children
(AFDC). Instead of providing low-income citizens with cash entitlements, TANF provides states
with $16.8 billion in block grants that may be used in any manner consistent with program
goals.17 While the federal government contributes the bulk of TANF’s funding, states also are
expected to contribute and are responsible for daily administration. Again, finding ways to
reduce costs is of interest to the states and federal government.
How EBT Delivers Food Stamp Benefits
EBT is an electronic payment system that allows food stamp benefit recipients to pay for goods
by transferring funds from a government-maintained account to a retailer’s bank account. In
most states that deliver food stamp benefits via EBT, benefit recipients receive a plastic card
with a magnetic stripe, resembling a debit card (Figure 1), and a personal identification number
(PIN). When benefit recipients purchase food, they inform the clerk that they wish to pay with
EBT; swipe their cards at a POS terminal located at the cash register and enter their PIN.
The clerk presses a button on the cash register, which sends the transaction via phone lines
(maintained by the EBT vendor or a third-party processor) to the EBT vendor’s processing
center. Computers at the processing center check whether the requested transaction has
originated from a valid terminal, involves an active case (based on records regularly sent by the
state), uses a valid PIN, and does not exceed the account balance. If those conditions are met, the
computer authorizes the transaction and sends approval to the cash register. The clerk completes
the transaction, and the benefit recipient leaves with groceries.18 Note that USDA regulations
prohibit merchants from assessing surcharges on electronic food stamp purchases.
At the end of the EBT vendor’s business day, the vendor’s computers total all food stamp sales
each authorized merchant made via EBT and transmits that information through the Automated
Clearinghouse Network (ACH) to a Federal Reserve Bank. The EBT vendor electronically
informs the state how much money needs to be available to honor that day’s EBT transactions.
The state’s computers request the funds from the USDA, which sends the funds electronically
through the Treasury Department to the state’s bank account. The state transmits the funds to the
EBT’s vendor bank account. Once funds are in place, the money is transferred from the vendor’s
account through a Federal Reserve Bank and deposited in each merchant’s financial institution.
At this point, the merchant’s transactions for the day are settled. Funds will be available in two
or three business days, depending on the policies of the merchant’s bank. The EBT vendor also
daily transmits transaction account information to the state, so the account records of each
benefit recipient can be balanced.19
Figure 1: Sample EBT Cards–Dakotas, Maryland, and Indiana
The State of EBT 10
How EBT Works to Deliver Non-Food Stamp Benefits
In states where benefits besides food stamps are delivered through EBT, recipients access their
food stamps in the manner described above. To draw cash benefits like TANF, recipients use the
same card and PIN at either POS machines or ATMs. Many states that provide non-food stamp
benefits permit recipients to access their cash benefits at POS machines located in food stores
and receive cash from the clerk. Cash transactions are processed in the same manner as food
stamp transactions, though the transactions cannot be processed simultaneously.20 If recipients
wish to tap both benefit streams, they must inform the clerk, swipe their EBT card and enter their
PIN twice. Before processing each transaction, the clerk presses a different key to properly route
the transaction. At the end of the EBT vendor’s business day, non-food stamp transactions are
settled in a manner similar to the one used to settle food stamp transactions. Note that many
states permit merchants to assess vendor fees or surcharges on non-food stamp benefits.
On-Line versus Off-Line EBT Technologies
The procedures described above apply to on-line EBT technology, which is used by all but two
states with active statewide systems. On-line systems function in a manner similar to commercial
debit or credit cards. When the EBT card is swiped through a POS machine, the information
contained in the magnetic stripe―normally the benefit recipient’s name, EBT account number,
and PIN―and information regarding the requested transaction are transmitted via telephone lines
to the EBT vendor’s processing center for authorization. This need for a live telecommunications
link is what constitutes “on-line” technology.21
Ohio and Wyoming use off-line systems. Off-line systems depend on smart cards, which are
plastic cards that resemble debit cards in size but contain a microchip. The microchip stores all
the information needed to complete an EBT transaction, including account balances, directly on
the EBT card. When a benefit recipient uses the smart card to purchase groceries, the card is
inserted in a smart card reader attached to the cash register. Since the smart card contains all of
the required information, there is no need for an on-line connection to the EBT vendor’s
processing center until the end of the business day when the merchant electronically transmits
information pertaining to completed EBT transactions. The vendor settles the transactions and
creates a shadow account for each benefit recipient, which may be used to restore benefits if an
EBT card becomes lost or damaged.22
EBT’s Design, Procurement Models, and Vendors
When EBT was proposed, the USDA recognized that building the EBT infrastructure from
scratch would be cost prohibitive. A feasibility study estimated it would take $233 million to
$291 million, with terminal installation being the most expensive part.23 The USDA thought that
if EBT could be integrated with existing commercial processing systems, the costs would fall to
an affordable level. Unfortunately, such integration proved more difficult than expected since
EBT, unlike debit card systems, required the flexibility to deliver multiple benefits subject to
various government regulations.24 The complexities involved in developing such systems have
not only led states to contract with private vendors, but also shaped how EBT systems operate.
Consequently, a familiarity with EBT’s procurement models, pricing plans, and market actors is
essential for understanding the technology.
The State of EBT 11
Procurement Models
States normally use one of three procurement models to obtain EBT systems.25 Each model
involves a prime vendor who manages the overall EBT system and subcontractors who
specialize in functional areas like card distribution. Since the procurement method selected
influences how a state’s EBT system operates, each method briefly is discussed. Table 2
summarizes the procurement methods used by the 41 states with statewide EBT programs.
Stand-Alone Procurement
In this method, an individual state purchases an EBT system on its own. The advantage of a
stand-alone procurement, used by 16 states, is that it allows a state to negotiate a contract
specifically tailored to its needs. States receive design flexibility and can experiment with
different benefits and technologies.26 Stand-alone procurements tend to work well for larger
states with high caseloads. Smaller states have encountered difficulties with stand-alone
procurements. Delaware’s attempt in 1999 to purchase a stand-alone system received no bids.27
Coalition Procurements
To achieve economies of scale, 23
states have joined purchasing
coalitions. The coalitions purchase the
same services obtained by stand-alone
states, but negotiate EBT contracts
jointly. While North Dakota and South
Dakota request proposals together,
other coalitions depend on a lead state
like New York to negotiate terms with
a vendor, who agrees to give coalition
members the opportunity to negotiate
for services within the framework
established by the lead state.28
Depending on the size of the lead
state, member states may receive
prices they would not otherwise receive. A downside of the coalition arrangement is that states
have less freedom to experiment with new programs, which is why Utah chose not to join a
coalition.29 The three coalitions are the Southern Alliance of States (SAS), the Western States
EBT Alliance (WSEA), and the Northeast Coalition of States (NCS).
State as Prime Contractor
Under the previous models, states negotiate with a prime contractor, and, as a result, are
constrained by the services and terms the contractor offers. This sometimes limits design
flexibility and benefits that can be delivered through EBT. Two states, Wyoming and Texas,
therefore have opted to serve as their own prime contractors. The social service departments of
these states negotiate directly with subcontractors to obtain the functions essential to an EBT
system.30
Table 3: Procurement Method by State
(Center for Community Capitalism)
Stand-Alone Procurement DC, IL, KS, LA, MD,
MI, MN, NJ, NM, OH,
OK, OR, PA, PR, UT,
WI
Coalition Procurement
Northeast Coalition CT, MA, NH, NY, RI,
VT
Southern Coalition AL, AR, FL, GA, KY,
MO, NC, SC, TN
Western Coalition AK, AZ, CO, HI, ID,
WA
Dakotas ND, SD
State Prime Contractor TX, WY
The State of EBT 12
Pricing Model
The dominant pricing model used in EBT systems has been the cost per case month (CPCM)
model in which a state is charged a fee for every active case in the system in a month.31 States
and vendors negotiate the specifics of the model (e.g., what constitutes an “active case”), but
irrespective of the details, the pricing model is extremely sensitive to changes in caseload levels.
If those levels fall rapidly, as has happened since the passage of PRWORA, vendors may find
themselves unable to cover their costs and recoup their investments. In fact, national
participation in the FSP decreased by 33 percent between federal fiscal years 1996 and 2001.32
Such decreases in caseload may lead to poorer service and higher prices, and drops in volume
and profitability may dissuade other vendors from entering the EBT market.
Market Evolution and Actors
When EBT expanded nationally, many financial institutions and computer processing companies
expressed an interest in the market. Early players in the EBT market included Mellon Bank, First
Union, NationsBank, IBM, Unisys, First Security, GM Group, and Zions Bank.33
As time passed, many of the firms encountered difficulties. Not only did it prove more
complicated than expected to deliver electronic food stamps, but also many firms were unsure
how to set an appropriate CPCM. The pricing issue was especially vexing because EBT required
extensive initial capital investments that would be recovered through the CPCM. Additionally,
many smaller firms capable of providing elements of EBT were unable to compete for EBT
contracts since states purchased all EBT services from a prime vendor, who in turn contracted
with other firms for specialized services. Unless a specialized firm managed to subcontract with
a larger vendor, the firm was excluded from the EBT market. As a result of these factors, the
EBT market gradually thinned.34
A few successful firms eventually emerged in the EBT market, with the big winner being
Citicorp Services, Inc. (CSI). CSI managed to capture the bulk of the market by designing a
standard EBT platform that could be deployed in any state. CSI also benefited by having access
to the extensive commercial-processing network maintained by its parent, Citigroup.35 Like CSI,
two other firms, e-Funds and Transactive Corporation, developed standard EBT platforms and
obtained state contracts. Lockheed Martin IMS enjoyed some success in the EBT market, though
it lacked the full processing systems possessed by its competitors.
The passage of time further thinned the market as states’ benefits caseloads declined.
Transactive, a G-Tech subsidiary, held contracts in Illinois and Texas but encountered financial
troubles. Under Transactive’s contract with the state of Texas, the company earned $2 per food
stamp client per month and $0.97 per TANF client per month.36 When the contract began, Texas
had a total caseload of 1.2 million, but the caseload eventually fell by 50 percent, causing
Transactive to incur large losses. Transactive attempted to sell its EBT assets to CSI for $11.5
million, but the U. S. Justice Department successfully blocked the sale on antitrust grounds.37
Transactive then left the EBT market,38 but not before granting GM Group the right to use its
equipment to provide EBT services in Puerto Rico.39
Meanwhile, Lockheed Martin IMS and e-Funds began to partner with CSI on numerous state
contracts. CSI normally served as the prime vendor, while the other firms acted as
The State of EBT 13
subcontractors. For Lockheed, subcontracting was the only way to remain in the EBT business
since the firm lacked the processing systems owned by CSI and e-Funds. This limited ability to
compete led Lockheed in July 2001 to sell its EBT business to Affiliated Computer Services, Inc.
(ACS), a firm that had recently developed EBT processing equipment.40
Today CSI, e-Funds, and ACS are the
three significant players in the EBT
market, with CSI leading the industry.
As Table 3 indicates, CSI holds prime
contracts in 30 of the 41 states with
statewide systems and subcontracts in
two additional states. CSI also has
negotiated noncompete agreements with
e-Funds, thereby insuring that e-Funds
will not bid against CSI when certain
contracts are rebid.41 These
developments have led to a market with
limited competition. For example, when
California solicited bids in 2001, it
received only one, from CSI.42
While CSI occupies a prominent place in the EBT industry, other firms recently have attempted
to enter. ACS purchased Lockheed’s EBT business and may compete against CSI in the near
future when a series of state contracts come up for renewal. Another new market entry occurred
when TRW secured Idaho’s contract.43 Moreover, the development of off-line EBT projects for
the delivery of WIC has attracted vendors like Stored Value Systems―which serves as a
subcontractor to CSI in Ohio44 ―into the market and may create niches for firms that specialize
in off-line systems. Such developments may signal a change in the EBT market.
Financial Impacts on the Federal Government and the States
The federal government initially viewed EBT as a way of lowering the administrative costs and
fraud losses associated with FSP. It also was thought that, by extension, states would save
money. Yet it is unclear whether these savings have materialized. The following sections
consider EBT’s impact on administrative costs in both food stamp and non-food stamp benefit
programs before turning to the issue of fraud reduction, particularly within FSP.
Impact #1: Administrative Cost Reductions
EBT’s overall impact on administrative costs appears mixed, though the effects are difficult to
gauge since accurate figures are unavailable. The Center for Community Capitalism’s 2001
survey of statewide EBT programs revealed that many states reported cost savings, but the
administrators who completed the survey provided few figures. Moreover, the numbers are
difficult to compare since states deliver different benefits via EBT and measure savings
differently. Arizona, for instance, reported general cost reductions of $150,000 to $300,000,45
while Texas reported combined federal and state savings of $126 million as of 2001.46 Some
states like Alaska claim that EBT systems cost more than the paper-based system.47 Similarly,
Table 4: Prime Contractor by State
(Center for Community Capitalism)
Citicorp Services, Inc. AK, AL, AZ, AR, CO,
CT, FL, GA, HI, ID, KY,
MD, MA, MI, MN, MO,
NH, NM, NY, NC, ND,
OH, PA, RI, SC, SD, TN,
VT, WA, WI
e-Funds KS, LA, NJ, OR, UT
Lockheed Martin/ACS DC, OK
Transactive IL
GM Group PR
State Itself TX, WY
The State of EBT 14
Nebraska, which activated its EBT system in the autumn of 2001, estimated that EBT would cost
more than paper food stamps. Nebraska calculated that EBT would raise administrative costs
from $2.10 to $3.20 per recipient per month, and total annual costs would rise from $880,000 to
$1.3 million.48 Such contradictory reports suggest that EBT has not achieved the across-the-board
savings originally envisioned by its supporters, even though some states have saved.
Despite these data limitations, it is possible to offer some insights into EBT’s impact on the
administrative costs associated with food stamp and non-food stamp benefits. The USDA’s 1994
evaluation of Maryland’s statewide EBT program―used to deliver food stamps, AFDC, and
three other non-food stamp programs―found that the overall CPCM of issuing all benefits
electronically ($3.85) was slightly lower than the comparable paper ($3.89). Annualized, EBT
yielded $120,000 (1993 dollars) in combined savings.49
When considering program costs in EBT, it is necessary to consider the allocation of savings in
addition to total savings. In Maryland, the administrative costs associated with authorizing,
delivering, redeeming, monitoring, and managing food stamps decreased, but the administrative
costs associated with non-food stamp benefits rose. The ultimate result was that the increased
cost of delivering non-food stamp benefits electronically nearly offset the FSP savings.50
It is not surprising that EBT raised the delivery costs of non-food stamp benefits. Prior to EBT,
non-food stamp benefits were delivered via paper checks―a relatively inexpensive payment
method for the government, though not necessarily for benefit recipients if they incurred check-cashing
fees. Switching to EBT for non-food stamp benefits replaced a low-cost, paper-based
delivery mechanism with a more expensive one. EBT processes every transaction through ATM
or POS networks, which charge for their services. These fees represent a cost that did not exist
prior to EBT, 51 and the incidence of these costs has become a contentious issue.
Meanwhile, food stamp savings in Maryland resulted from a variety of factors. First, EBT
lowered the costs associated with approving people for food stamp benefits and establishing their
benefit accounts by reducing the time and labor needed to complete these tasks. In addition, by
eliminating paper coupons, the system also eliminated all of the costs associated with printing,
handling, redeeming, and destroying paper food stamps. Second, the processing costs associated
with electronic food stamp benefits were lower than those associated with non-food stamp
benefits since food stamp benefits were delivered through POS systems, not ATMs. The size of
ATM fees, coupled with the higher number of ATM transactions, made ATM transactions more
expensive than POS transactions. Third, electronic food stamps reduced fraud.52
The difference in savings between food stamp and non-food stamp benefits was not
unanticipated. A 1990 USDA evaluation predicted that monthly operating costs for a national
EBT system would exceed the monthly operating costs of the existing paper-based system,
though the increase would be partly offset by fraud reductions and improved public perception of
program integrity.53 The potentially higher cost became an issue when Maryland was planning its
EBT program during the early 1990s. The federal Department of Health and Human Services
(DHHS), which oversaw AFDC (now TANF), recognized that AFDC costs could rise under EBT
and leave the agency with a financial liability, but the USDA, which already had run and
evaluated EBT pilots for food stamps in several jurisdictions, expected to save money. These
The State of EBT 15
competing interests led DHHS, USDA, and Maryland to negotiate the EBT Single
Administrative Grant (EBTSAG). This document required Maryland’s planned EBT project to
be cost-neutral to the federal government. Neither USDA nor DHHS would pay more for EBT
than for paper benefits; if EBT cost more, then Maryland would absorb the difference. In return,
USDA and DHHS agreed to combine resources and pay half of the system’s administrative
costs. EBTSAG was significant because it established the concept of cost neutrality, which has
evolved into a cornerstone of federal EBT policy.54
The USDA’s evaluation of Maryland’s EBT program found that EBTSAG influenced the
division of costs between the federal government and the state. After accounting for federal
reimbursements, the evaluation found that the federal government saved money under EBT
while the state government spent more. This happened because the federal government
eliminated the costs associated with printing paper coupons, while the state incurred new costs
dealing with the EBT vendor.55
In subsequent years, external factors also have influenced EBT’s costs. Most notably, the federal
Telecommunications Act of 1996 allowed telephone companies to charge telephone call centers
$0.29 for calls originating from pay phones.56 Since EBT vendors process all transactions and
provide all customer service functions through telephone centers, EBT costs increased, and
vendors passed those costs on to the states. Arizona, for instance, estimates that this change alone
raised its EBT costs by $12,000 per month.57
Impact #2: Impact on Fraud
EBT has enriched the ability of the government to detect fraud in both food stamp and non-food
stamp programs, though fraud always has been a more pressing matter within the FSP because
benefits are restricted to the purchase of certain goods. Since the government does not restrict the
use of non-food stamp benefits, this form of fraud was never an issue. This section of the
working paper therefore focuses primarily on EBT’s impact on food stamp fraud, with some
attention given to non-food stamp benefits.
Illegal Trafficking of Food Stamp Benefits
Benefit trafficking, which occurs when recipients sell their benefits at a discounted rate to
retailers in exchange for cash, is the most significant form of food stamp fraud. Fraudulent
retailers typically pay a recipient $0.50 for every $1.00 in benefits and then redeem the food
stamps at their face value.58 The USDA estimated that the trafficking rate between 1996 and
1998 equaled 3.5 percent of benefits issued.59
Responsibility for detecting trafficking is divided between the FNS and the states. The FNS is
charged with monitoring retailers for program compliance, while states attempt to detect fraud
among benefit recipients.60 Since trafficking involves both retailers and benefit recipients, the
FNS and the states need to coordinate their efforts. When the FNS investigates a retailer, it
normally provides the appropriate state with a list of benefit recipients suspected of trafficking,
and the state is supposed to follow up on the leads.61 Unfortunately, this two-tiered approach
historically has not worked well because proving fraud against benefit recipients and retailers has
required the use of lengthy and costly undercover investigations and e FNS has lacked the ability
to enforce fines. The General Accounting Office (GAO) found that the USDA collected only 13
The State of EBT 16
percent of assessed fines between 1993 and 1998 and deemed 55 percent of the total fines, or $49
million, uncollectible.62
EBT has the potential to improve this situation. Between 1993 and 1998, the trafficking rate fell
half a percentage point, a decline that both the USDA and GAO have attributed partly to EBT.63
EBT systems, however, are not immune to trafficking. Merchants can pay benefit recipients a
discounted rate for the electronic food stamps, run the recipient’s card through a POS terminal,
enter the recipient’s PIN, and receive the full benefit amount. An example of this occurred in
Portland, Oregon, when the owners of a small grocery used trafficked EBT food stamp benefits
to redeem an amount $250,000 greater than the store’s gross food sales.64
Nevertheless, EBT renders trafficking easier to detect because electronic transactions generate
digital records that can be analyzed with computers. Instead of conducting lengthy and expensive
undercover operations, investigators are allowed under PRWORA to mine transaction records for
patterns that indicate illegal activity and use that evidence against violators.65 This happened in
Louisiana, where investigators matched EBT transaction records to state sales tax records to
apprehend a ring of grocery stores responsible for trafficking $20 million in food stamp benefits
and transferring the proceeds to the Mideast. What caught the attention of investigators was the
fact that, in certain stores, EBT transactions accounted for 52 percent to 115 percent of the
store’s total food sales, while the state average for retailers was 9 percent.66 A similar example
occurred in New Jersey, where investigators found a store redeeming $100 in food stamps every
six minutes.67
Other Forms of Food Stamp Fraud and Non-Food Stamp Fraud
Though trafficking is a form of fraud unique to food stamps, it is not the only form of fraud. The
U. S. Secret Service, which polices fraud in EBT systems, has observed, “EBT is open to a wide
variety of fraud, including multiple false applications for benefits, counterfeiting of the EBT
card, and trafficking of noncash benefits for cash or contraband.”68
Mail fraud also affects food stamp and non-food stamp programs. However, by reducing the
need to mail benefits, EBT has helped to reduce the theft of those benefits. According to the
Center for Community Capitalism’s survey of EBT programs, many states claim to have
eliminated mail fraud.69
Another type of fraud occurs when people use false names to apply for and receive multiple sets
of benefits. EBT currently is unable to detect this type of fraud, though technological
modifications eventually could allow EBT to do so.
Consumer Effects
EBT systems are designed to deliver social welfare benefits to qualifying individuals, and the
experiences these recipients have with the system need to be considered. Gauging effects on a
national level is a complicated undertaking since EBT programs and the accompanying
consumer issues differ among states. Concerns in a state that delivers both food stamp and non-food
stamp benefits may not apply to states that only provide food stamps.70 Nevertheless, a
The State of EBT 17
review of the available literature suggests that nine significant consumer issues pertaining to
EBT have arisen:
􀂾􋸠 Surcharges and fees
􀂾􋸠 Recipient training
􀂾􋸠 Customer service
􀂾􋸠 Technological failures
􀂾􋸠 Consumer protection
􀂾􋸠 Interoperability
􀂾􋸠 Privacy
􀂾􋸠 Card replacement
􀂾􋸠 Access to farmers’ markets
Overall Consumer Satisfaction with EBT
It is difficult to speak definitively about the satisfaction of EBT recipients because EBT
programs differ among states and no comprehensive studies have been attempted. The existing
literature consists of studies of particular states, and many of these analyses are qualitative
surveys of EBT administrators and advocates for benefit recipients that ask these stakeholders
what they understand EBT’s impacts on recipients to be. Nevertheless, it is possible to offer
some general insights into consumer satisfaction with EBT.
Overall, benefit recipients appear satisfied with EBT, particularly the food stamp aspect of the
program. A survey of advocates and EBT administrators in ten states and two pilot projects in
California counties revealed that most respondents generally preferred EBT to paper food
stamps.71 This observation is supported by various state-specific studies of EBT recipients. The
earliest comprehensive study of a statewide EBT program occurred in Maryland (which delivers
both food stamp and non-food stamp benefits) and found that an overwhelming majority of
benefit recipients preferred EBT.72 Reasons for the preference included greater benefit security,
enhanced convenience, and reduced social stigma, because using paper food stamps at the store
clearly identified the user as a benefit recipient. The continued validity of these results is
hindered by the fact that they are dated and the way in which non-food stamp benefits are
delivered has changed. At the time of the evaluation, Maryland allowed non-food stamp benefit
recipients to use ATMs for free; this is no longer the case.
The general findings of the Maryland evaluation received support from the North Carolina
Financial Services Survey, a study of past and present North Carolina welfare recipients
conducted in 2001 by the Center for Community Capitalism. Respondents were asked a series of
questions pertaining to their experiences with the EBT system (food stamp only). Sixty percent
of respondents claimed to have only positive reactions to EBT, and less than 1 percent claimed to
have overwhelmingly negative attitudes.73 Consistent with the Maryland evaluation, the most
commonly cited reasons for positive reactions were the system’s ease and reliability (69 percent)
and security (15 percent).74
Another positive aspect of EBT is that it may have decreased the participation costs of benefit
recipients. Under paper-based food stamps, recipients needed to redeem their benefits at banks or
check-cashing establishments, a process that often involved such out-of-pocket expenses as
The State of EBT 18
Graph #2: Number of Free ATM Transactions
(Center for Community Capitalism)
9
7
3
11
1
0
2
4
6
8
10
12
0 2 3 4 Unlimited
Number of Free ATM Transactions
Number of States (n=31)
Graph #3: Fees for Additional ATM Transactions
(n=31)
(Center for Community Capitalism)
1
1
1
1
22
2
3
$0.00 $0.33 $0.40 $0.45 $0.85 $0.50 $1.00
transportation and childcare. Since the need to redeem benefits in this manner is not part of EBT,
these out-of-pocket costs theoretically were eliminated.
Such findings support the claim that benefit recipients generally are satisfied with EBT. This
does not mean that the system is perfect. Certain problem areas, particularly with the delivery of
non-food stamp benefits, need to be understood and addressed if EBT is to realize its goals.
Issue #1: Vendor Fees and Surcharges
This is perhaps the most contentious issue in EBT. Though USDA regulations prohibit
merchants from charging fees and surcharges for purchases made with electronic food stamps,75
these regulations do not apply to non-food stamp benefits like TANF. With the exception of New
Mexico, all states that deliver cash benefits via EBT allow recipient access to cash to be limited.
Recipients are allowed a certain number of free cash transactions per month (between zero and
four, with four being the most common). After the limit is reached, the EBT vendor may assess
a fee on subsequent transactions (see Graph 2). The typical fee is $0.85 (see Graph 3).
Additionally, recipients may incur surcharges, ranging from $1.00 to $2.00 in some states, when
they access cash at ATM or POS machines.76
Understanding the Fee Structure
Before further exploring the link between EBT and fees, it is important to discuss the three main
types of fees assessed at ATMs. Shortly after banks began deploying ATM machines, they
realized they could lower transaction costs by increasing transaction volumes. A simple way to
accomplish this was to link their machines to the ATMs operated by other banks.77 This resulted
in the creation of ATM networks like Cirrus and Plus. When a person with an account at one
bank uses a network ATM owned by another bank, the person’s bank is charged an interchange
fee, which passes along the cost incurred by the ATM’s owner to execute the transaction over the
network. To compensate for the interchange fee, the person’s home bank may levy a foreign fee
on the consumer. Since 1996 network policies also have allowed banks and other ATM owners
to assess direct surcharges on noncustomers. This allows banks and ATM owners to make
serving noncustomers a discrete profit center.
Such flat fees can be significant on small transactions like those typically conducted by benefit
recipients. For instance, typical fees for a $25 transaction could easily be 8 percent, if the ATM
The State of EBT 19
owner charges a $1 surcharge and the home bank a $1 foreign fee. To minimize the fees’ impact,
consumers could withdraw higher sums of money (e.g., $100 instead of $25), but the trade-off is
the increased security risk involved with carrying cash. From the consumer’s standpoint, ATM
fees, particularly surcharges, are unpopular ways of making people pay for their money. Banks
view the charges as valid ways of passing along costs, generating revenues, and financing the
placement of off-site ATMs. However, ATM fees raise equity concerns because minority
neighborhoods are more likely to have ATMs that charge surcharges than nonminority areas.78
ATM Fees and EBT: New York City As An Example
A 2001 report by the New York State Comptroller noted that prior to EBT, the state’s benefit
recipients received their food stamp and non-food stamp benefits twice a month at participating
check cashers. The check cashers received a fee from the state in return for this service. Under
New York’s EBT contract with CSI, cash recipients receive four free transactions per month at
Citibank ATMs. If recipients make more than four transactions, they pay $0.85 per transaction.
Moreover, if individuals use a non-Citibank ATM to access their welfare benefits, they may be
assessed a direct surcharge of $1 to $2, depending on the ATM’s owner.79 A direct surcharge
also may be assessed if recipients receive cash back from POS machines.
Additionally, access to Citibank ATMs was limited for many New Yorkers. At one time, benefit
recipients residing in the three poorest zip codes in New York City had access to a total of six
free ATMs.80 This, coupled with other developments, led the New York State Attorney General
to sue CSI. As part of the settlement, CSI pledged to place an additional 149 free ATM machines
in low-income neighborhoods.81 Nevertheless, the combination of fees and limited access to free
ATMs has led to costs for benefit recipients. The State Comptroller estimates that recipients in
New York City paid $647,087 and $700,151 in fees during January and February 2001,
respectively.82 Under the previous system, many of these fees would not have been incurred.
State Responses to Fees and Surcharges
States have not been blind to the consumer impact of vendor fees and surcharges and are
working to mitigate their effect. Massachusetts, for instance, prohibits fees and surcharges at
POS machines but permits surcharges at ATM machines. However, the state has persuaded
banks to waive ATM surcharges for EBT recipients.83 Kentucky also has tried to persuade the
private market to provide free EBT access; it convinced Dairy Mart Convenience Stores to
modify their surcharge-free ATMs to accept EBT.84 This approach may provide retailers with a
competitive advantage.85
Other states have chosen a more regulatory approach. Minnesota has capped the total amount of
fees and surcharges that a recipient may pay at $10 per month.86 Illinois has tried to tackle both
fees and balance inquiries (discussed in next section) by granting recipients four free balance
inquiries each month in addition to four free withdrawals.87 All subsequent balance inquiries cost
$0.50 instead of the $1.00 charged for cash access. While such measures no doubt help benefit
recipients, these strategies―both the market-based and government-based ones―ignore the key
matter: Under EBT, benefit recipients pay “fees that most regular customers do not have to
pay―fees that are deducted from their welfare benefits.”88
The State of EBT 20
Balance Inquiries
Opinion is divided over whether or not benefit recipients should be permitted to use EBT to
check their balances. Disagreement also has emerged over whether or not recipients should be
charged for balance inquiries. From a consumer standpoint, the ability to check balances is
important because it helps people manage their finances, but vendors are concerned that benefit
recipients will check their balances too often, increasing operating costs.
States have responded to the balance inquiry issue in a scattered fashion. Six states prohibit
balance inquiries, while 14 allow unlimited inquiries. Five other states count balance inquiries
toward a client’s monthly allowance of free transactions. In some states where balance inquiries
are allowed, the vendor fees and surcharges described above may apply to those inquiries.
Additionally, all states note that benefit recipients may obtain balance information by calling the
EBT system’s toll-free service line and speaking to a customer service representative; but as will
be discussed later, questions have surfaced regarding the service lines. Access to balance
information raises equity questions, too, since non-EBT citizens easily may check their bank
balances at ATMs, and, prior to EBT, benefit recipients always knew their balances because they
could see how much cash they had left.
Issue #2: Recipient Training
EBT represents a fundamental shift in how food stamps work, so the USDA requires states to
provide recipients with hands-on training in EBT.89 Recipients should be taught how to use the
system, how to report lost or stolen cards, how to recognize participating stores, and how to
protect their rights.90 At least 27 states have received USDA waivers and use mailings to teach
current benefit recipients who are switching to EBT.91 New recipients who obtain in-person
training normally receive it from a caseworker, not the vendor, and the “typical training
programs include watching a video, practicing on a mock terminal, and asking questions of
caseworkers.”92
Many advocates question the effectiveness of EBT training. Mailings may be ineffective when
recipients have low literacy levels or limited proficiency in English, and the availability and
quality of in-person training varies widely. Training videos reportedly are “too short and do not
contain enough information on direct deposit options and other low-cost bank accounts.”93 Such
training methods may undermine EBT’s effectiveness.
Additionally, studies have found training coverage to be incomplete. For example, only 10
percent of New York City’s recipients received in-person training at conversion,94 while in North
Carolina about half of each county’s recipients received training.95
Issue #3: Customer Service
All EBT states require vendors to provide customer service, normally through the combination of
Audio Response Units (ARUs) and live service representatives accessible around the clock
through a toll-free telephone line.96 The ARUs and service representatives are supposed to assist
clients with EBT problems like lost or stolen cards, and provide balance and transaction
information. While no federal regulations apply to customer service standards, states have
specified performance measures such as average answer time, maximum hold time, abandoned
call rate, and number of callers who receive busy signals.97
The State of EBT 21
Unfortunately, many of the performance standards go unmet. During the period of June 1999
through March 2000, CSI fulfilled none of the service standards required under its contract with
the state of New York.98 CSI’s most serious failure pertained to hold time. While the contract
requires CSI to return to 95 percent of the calls placed on hold within 30 seconds, CSI never met
that requirement.99 What makes these results significant is that CSI handles the ARU functions
for all of its EBT contracts from the same three call centers, so if CSI is experiencing difficulties
in New York, it likely is missing standards in other states.100 This assumption is supported by a
Consumers’ Union study of EBT administrators and consumer advocates in ten states that found
respondents “reported problems with telephone wait times and busy signals.”101
The inability of vendors like CSI to meet service standards is related to EBT’s economic
structure. As discussed previously, EBT vendors have experienced financial difficulties and are
trying to recoup their initial investments by lowering costs. Reducing customer service is a
logical place for vendors to realize savings since the callers to the service line form a captive
audience; they have no other place to take their business.102 The result is that benefit recipients
may receive poorer service, while states fail to receive contracted services.103
Issue #4: Technological Reliability
A downside of computerized systems is that they may crash. In 1999, for instance, a telephone
line failed and caused the EBT systems in Georgia, Maryland, North Carolina, Florida,
Pennsylvania, and the District of Columbia to fail simultaneously for 24 hours.104 Such failures
inconvenience merchants and recipients.
Federal regulations require all EBT systems to develop manual backup procedures for use during
system failures.105 In most states, if the EBT system is down when a benefit recipient is
attempting to buy food, the merchant can call the EBT service line to request a transaction
authorization. If the authorization is given, the merchant uses a paper voucher to complete the
sale. When the system is repaired, the merchant uses the information on the voucher to settle the
transaction. While this procedure sounds straightforward, merchants dislike it since it is difficult
to reach the service line during technological failures, when a spike in call volumes taps the
service systems’ limited capacities, causing merchants to receive busy signals. This means that
the merchants must keep calling back, tie up the store’s customer flow, deny a sale, or issue an
unauthorized voucher. This last option is risky since, under EBT, merchants are liable if it later is
discovered that a recipient’s account has insufficient funds.
Benefit recipients may suffer in a variety of ways when EBT systems fail. Some merchants may
refuse to sell food during a system outage, thereby denying access to a necessity. This problem
may be compounded if the system remains down for an extended time. Another technological
problem that consumers confront is when the system incorrectly debits an account. For instance,
a benefit recipient may purchase $20 in food but have $25 in benefits deducted, or a consumer
may have a transaction denied yet still have benefits deducted. When such mistakes happen, the
recipient can go to the social service office and request a correction or emergency food stamps,
but this option is both time consuming and of limited use if the problem occurs after business
hours. Moreover, once a problem comes to light, its resolution may take time.
The State of EBT 22
An illustration of how a technological failure can affect benefit recipients occurred in 2001 when
a computer error interfered with EBT transactions across the nation.106 Some 6,000 transactions
were garbled, and as a result, people were improperly denied benefits, had their benefits debited
twice, or had their transactions denied but their benefits debited. When the problem came to light
in Missouri, the Department of Social Services told one recipient that re-crediting the account
could take up to 45 days and if food was an issue, the recipient should visit a food pantry. While
this particular woman’s experience is anecdotal, it demonstrates the potential impact that an EBT
failure can have on a person’s ability to obtain food.
Disaster Responses
A related question is what happens to benefit recipients during a natural disaster like a hurricane
or tornado that either results in people being eligible for emergency food stamps or prevents
existing recipients from using their benefits. The USDA requires states to develop disaster plans
for food stamp delivery, but states enjoy a great deal of latitude in developing disaster responses.
States like Florida and South Carolina depend on prepared EBT cards that contain a
predetermined benefit level (e.g., $50) and can be issued immediately to people deemed eligible
for disaster aid.107 These cards rely upon the same on-line technology that supports the states’
EBT systems. Other states like North Carolina require vendors to increase the production of
cards during a disaster, though this approach hinges on a vendor’s ability to produce enough
cards and ship them quickly to the disaster area. These two responses were put to the test when
Hurricane Floyd hit the Carolinas in 1999. North Carolina encountered difficulties when its
vendor could not produce and ship enough cards to the afflicted counties, while South Carolina’s
procedure, coupled with the storm’s smaller impact, allowed the state to respond in a better
manner.108
For these two disaster responses to function, the EBT technology must remain in operation. If the
technology fails, some states depend upon the manual voucher process described earlier, but
questions surround the manual system’s potential effectiveness during a large emergency. Also,
since the USDA’s regulations apply only to food stamp benefits, there exists no guarantee that
non-food stamp benefits delivered via EBT will be available during a disaster. Some states have
realized the potential impact that a disaster could have on EBT and have tried to be proactive, but
progress has been limited, partly because EBT vendors have moved slowly.
Issue #5: Consumer Protection
A contentious issue that emerged when the federal government was drafting EBT regulations
pertained to the extension of consumer protections to EBT. Section 904 of the Electronics Funds
Transfer Act (known as Regulation E) requires banks to provide consumers with certain
protections, including protection from unauthorized transactions. If a person loses a credit or
debit card and reports the loss or theft to the issuer within 48 hours, Regulation E limits the
person’s liability to $50 in the event the card is used to make unauthorized purchases.
In spite of state opposition, the Federal Reserve decided in 1994 that Regulation E protections
should apply to EBT programs. States with EBT systems were given three years to comply.109
Besides extending the liability protection, the Federal Reserve also stated that unused benefits
should be replaced in situations where an EBT card is lost or stolen. States were concerned
because they believed these provisions would allow benefit recipients to transfer or traffic their
The State of EBT 23
benefits illegally, claim their cards lost or stolen, and receive replacement benefits, leading
ultimately to higher state costs. States not only would be rewarding illegal behavior, but they
also would be powerless to stop such actions since, unlike banks, they could not cancel a
person’s account. Furthermore, states argued that applying Regulation E to EBT was
unnecessary because federal regulations governing FSP and state administrative procedures
regarding non-food stamp benefits already provided benefit recipients with adequate protections.
Advocates for benefit recipients responded by noting that extending Regulation E to EBT would
help recipients in several ways. First, the liability protection would cover people in situations
where ATM machines failed to dispense funds yet deducted benefits, or where ATM or POS
machines erred and charged someone twice for the same transaction. Second, Regulation E
provides more extensive protections than federal or state EBT regulations. Regulation E limits a
person’s total liability to $50, while administrative procedures typically state that recipients lose
all the benefits that are improperly used before the loss or theft is reported.110 If all the benefits
are used, the person loses all the benefits. This raises an equity concern since, without the
Regulation E protections, benefit recipients whose cards are lost or stolen are treated differently
from other consumers. Third, advocates noted that the monthly financial statements required by
Regulation E would help recipients better plan and manage their personal finances. Fourth,
advocates challenged the states’ assumption that benefit recipients “are more likely to lose their
cards, or … perpetuate fraud than the average citizen.”111 Finally, advocates argued that
extending Regulation E protections would add minimal costs to EBT.
In response to the conflicting claims, the USDA sponsored a one-year EBT pilot project that
explored the use of Regulation E in six locations in New Jersey and New Mexico.112 The results,
published in 1997, found that Regulation E had no significant impact on either the rate of
benefits reported as lost or stolen or benefit replacement costs. While Regulation E did increase
the administrative costs to states for processing and investigating claims, the study found that
these costs resulted from poor organizational designs and could be reduced by redesigning jobs
and merging lost/stolen card services with the EBT vendors’ help desk services. Nevertheless,
the Federal Reserve reversed itself and declared that EBT accounts were not “consumer asset
accounts” and were therefore exempt from Regulation E.113 The Electronic Funds Transfer
Association (EFTA), an EBT trade association, claims the decision to exempt EBT from
Regulation E was instrumental in EBT’s development. Without the exemption, so the EFTA
argues, states would have delayed implementation due to fears of open-ended liabilities.114
Issue #6: Interoperability: A Recipient’s Perspective
Under the paper-based system of food stamps, recipients could use their benefits at any
authorized food-stamp retailer. A resident of northern Indiana, for example, could cross the
border and use food stamps to shop at stores in Michigan, just as New York residents could shop
in New Jersey. Similarly, non-food stamp benefits could be used anywhere in the country. TANF
recipients in Oregon, for instance, could cash their benefits and use the cash in California. Under
EBT, states could end this practice by requiring that benefits be used only in the issuing state.
This possibility led advocates for benefit recipients and merchants to raise the issue of
interoperability.
The State of EBT 24
Interoperability refers to the ability of EBT systems in different states to communicate with each
other. When EBT first began, interoperability was a key issue since many states were pursuing
stand-alone procurements, and there existed no guarantees that EBT systems in any given state
would be compatible with others. In response, some states voluntarily addressed the problem by
collaborating in the development of QUEST.
Overseen by the National Automated Clearing House Association, QUEST is a series of
evolving rules intended to create a “uniform operating environment for EBT.”115 The voluntary
QUEST protocol currently is used in 31 of the 41 states with statewide EBT systems, and benefit
recipients who reside in a QUEST state can access their food stamp and non-food stamp benefits
in other QUEST states. The QUEST logo may be displayed at participating ATM and POS
machines, which visually informs consumers that their benefit cards are accepted at that
machine. This protocol has helped to preserve the portable nature of food stamp and non-food
stamp benefits by preventing the proliferation of incompatible EBT systems.
Nevertheless, QUEST is an imperfect solution. Since the protocol is voluntary, states do not have
to participate, which can lead to problems. For example, benefit recipients residing in the
neighboring cities of Gallup, New Mexico, and Window Rock, Arizona, are unable to shop in
each others’ cities since Arizona is a QUEST state but New Mexico is not. 116 The result is that
people potentially are limited in their choice of shopping places, and merchants lose out on sales.
Realizing that a lack of interoperability could derail the full implementation of a national EBT
system for food stamps, Congress passed the Electronic Benefit Transfer Interoperability and
Portability Act of 2000. This law requires states to develop interoperable EBT systems for food
stamp delivery, thereby ensuring the portability of food stamp benefits across state lines. While
the law does not address the portability of non-food stamp benefits, that may be less of an issue
since those recipients could cash the benefits in the issuing state and spend the currency in any
location of their choosing.
Issue #7: Privacy
Prior to EBT, benefit recipients could use their benefits without the government knowing how
they were being used. Food stamp recipients used their coupons at stores, and merchants
ultimately redeemed those vouchers, but in the process no records were created that could link a
transaction to a person. EBT has changed that.
Unlike the old system, EBT generates a record of each transaction. At a minimum, the system
records the transaction date and time, the total amount of the transaction, the type of benefit used
(e.g., food stamp or cash), and the location of the transaction.117 The potential exists to expand
EBT to track the kinds of goods being purchased. The USDA conducted a pilot program in South
Carolina to demonstrate the feasibility of linking EBT transaction data to the bar code data
scanned at supermarket cash registers.118 While information currently in EBT systems is not
shared with merchants or ATM owners, the state can use the information to detect fraud or in
other ways it sees fit. This ability raises questions about how client information is used and how
to balance the state’s interest in preventing fraud and delivering effective services against
privacy interests. One way that the state can strike this balance is by developing guidelines
regulating how information can be used and who can see that information.
The State of EBT 25
A related issue that has concerned some advocates is the technological ability to link EBT to
other parts of the social service system. New Mexico, for instance, plans to make EBT capable of
recording the time an individual spends on workfare assignments.119 Eligible benefit recipients in
New Mexico, as in other states, are required to spend a certain number of hours each week in
approved work activities; failure to comply may result in sanctions or loss of benefits. Some
critics question whether the state should collect data on the same card used to dispense benefits.
Errors could result in eligible recipients being unable to use their benefits until the problem is
resolved and thus impose undue hardships on low-income individuals.
Issue #8: Card Replacement
Having a card lost or stolen is a potentially serious problem for benefit recipients since they
cannot receive their benefits until a replacement card is issued. USDA regulations require that
cards be replaced within two days, but 26 states have received waivers that instead allow them to
replace lost or stolen cards within three to five days.120 Opinion is split over whether this is a
reasonable or punitive policy.
Card replacement is a significant cost in some states. Maryland estimates that it replaces 5 to 6
percent of its cards each month.121 To discourage lost cards and reduce costs, some states charge
replacement fees. These fees are permitted under USDA regulations, and the fee varies among
states. Both Minnesota and Colorado charge $2.122 While it makes sense on one level to assess
replacement fees, some advocates argue that these fees, which normally are deducted from a
person’s benefits, punish people who are not trying to cheat the system, but honestly may have
lost their cards.
Issue #9: Access to Farmers’ Markets
The purpose of FSP is to help low-income Americans purchase nutritious food. While the
overwhelming majority of food stamp purchases are made at supermarkets, farmers’ markets are
also a popular venue for food stamp purchases. These markets provide benefit recipients with
access to some of the freshest and most nutritious food available. Under the paper-based system
of food stamps, recipients could shop at farmers’ markets and use their food stamps like cash.
However, the move to EBT changed that; since many of these markets are held outdoors, they
lack access to the computer systems and telephone lines needed to process EBT, which threatens
to prevent recipients from shopping there.
To preserve access, the USDA began experimenting with ways of tailoring EBT to the farmers’
market environment. The first pilot began in 1998 in Hawaii and involved a scrip system.123
When food stamp recipients arrived at the market to shop, they first went to the manager’s booth,
which was equipped with POS equipment. The manager would debit the EBT card for the
amount requested by the recipient and provide scrip that could be used to purchase goods at
various stalls. If the recipient had scrip remaining at the end of the day, the manager’s booth
collected it and credited the recipient’s EBT account. Scrip projects have been replicated at other
sites around the country, including New Mexico and Washington State.
More recently, states have been experimenting with wireless technology, which does not require
the installation of phone lines, at farmers’ markets. The hope is that this will allow every market
The State of EBT 26
vendor to accept EBT, thereby eliminating the need for scrip. Florida experimented with wireless
technology in 2000, but technological difficulties troubled the initiative. Meanwhile, New York
City conducted a pilot in 2001, but the project’s success remains undetermined since evaluation
has not been completed. The District of Columbia also is considering the use of wireless
technology.124 While the idea remains unproven in a farmers’ market setting, it has gained
popularity. The farm bill that was passed by the U..S. Senate in February 2002 and currently is in
conference committee, provides $3 million in funding for wireless technology.125
Merchant Concerns
EBT’s impacts are not limited to governments and benefit recipients. The 156,000 retail
establishments (e.g., groceries, convenience stores, drugstores, and supermarkets) authorized to
redeem FSP benefits form a group with both a distinct set of financial interests in EBT and a
unique role in its success.126 These retailers enjoy access to a national food stamp market valued
at $15 billion a year,127 an interest that leads them to monitor policy changes to the FSP closely.
It is important to understand EBT’s impacts on merchants, who have five areas of particular
concern:
􀂾􋸠 System costs
􀂾􋸠 Government reimbursements
􀂾􋸠 Technological reliability
􀂾􋸠 System interoperability
􀂾􋸠 Cash flow
Concern #1: System Costs
Merchant participation in EBT is voluntary, though essential to success. The draw for merchants
is supposed to be EBT’s ability to reduce the time and costs involved in handling food stamp
transactions, but it is unclear whether these savings have materialized. In fact, the various
research studies that have been undertaken offer contradictory conclusions.
EBT’s Impact on Operating Costs for Food Stamps
Conventional wisdom, merchant feedback, and previous research indicate that paper food stamp
transactions cost merchants more to complete than non-food stamp transactions, cost differences
that advocates claimed would be at least partially alleviated by EBT. Food stamps are restricted
to the purchase of certain goods, requiring cashiers to distinguish between eligible and ineligible
goods. The manual system requires cashiers to categorize goods and accept the appropriate
payment forms, which results in slower checkout times. At the end of day, merchants need to
handle, deposit, and reconcile paper food stamps transactions. Additionally, merchants incur
costs related to training staff to recognize food-stamp eligible goods, reshelving items not
purchased due to insufficient food-stamp balances, failing to capture all proceeds due to manual
accounting errors, and losing interest during the time between accepting a food stamp and
depositing it at a bank.128
While many of the same kinds of costs are associated with EBT, advocates argued that EBT
would reduce certain costs and eliminate others. In particular, it was thought that EBT would
eliminate the back-office costs associated with paper food stamps, which merchants historically
The State of EBT 27
have complained about as being the most onerous part of participating in the FSP. However,
various research studies have documented mixed results regarding EBT’s impact on merchants’
operating costs.
One of the first studies to address merchant costs was the USDA’s 1994 evaluation of
Maryland’s statewide EBT program. Through the use of longitudinal data, the USDA compared
eight kinds of merchant costs under electronic and manual food stamp systems. The study
concluded that EBT had no impact on total costs. While EBT lowered total merchant costs by
$0.06 per $1,000 in redeemed benefits, this effect was deemed statistically insignificant.129 EBT
did significantly lower the back-office costs involved with handling, reconciling, and redeeming
food stamps, but this decrease was offset by a significant increase in checkout costs.130 In spite of
this outcome, the evaluation found that Maryland merchants generally preferred EBT to paper
food stamps and claimed EBT resulted in “easier handling” of transactions.131
These general findings have been supported by other studies. For example, a 2000 study of
merchant EBT costs in Pennsylvania sponsored by the Food Marketing Institute and the
Pennsylvania Food Merchants Association found that EBT reduced the costs involved with
handling paper coupons at the end of the business day but increased the time needed to complete
a food stamp transaction at the register by 19 seconds, due in part to the time spent waiting for
the EBT system to authorize the transaction.132 This translated into an overall net cost increase of
$0.064 per food stamp transaction. The finding that EBT lengthens transaction times was
consistent with an earlier USDA study of the Reading, Pennsylvania, pilot (the nation’s first EBT
project), which concluded that EBT “adds 10–15 seconds to the transaction time.”133 Though
consistent with previous evaluations, the Pennsylvania finding attracted criticism from a variety
of sources. Merchants complained that the cost figures were too low because the study omitted
the costs incurred when EBT systems fail. Other interested parties like EBT vendors, meanwhile,
argued that the study was unfair because it was too small in scope and occurred too soon after
Pennsylvania implemented its statewide system.134
EBT’s Impact on Merchants’ Capital Costs
Besides affecting operating costs, EBT participation carries potential capital costs for merchants
since they need to obtain the necessary equipment to process EBT transactions. To prevent the
shifting of program costs to merchants from the government, federal regulations specify that
“authorized retailers shall not be required to pay costs essential and directly attributable to EBT
system operations.”135 Federal regulations also require states to provide free POS equipment
designed to process only EBT transactions to those authorized retailers who request it.
These regulations have allowed smaller retailers who never previously accepted electronic
payments of any kind to obtain the equipment needed to remain in FSP and encouraged them to
begin accepting commercial credit and debit card transactions.136 The USDA’s 1994 evaluation
of Maryland’s statewide EBT program found that many of the merchants who had never engaged
in electronic commerce prior to Maryland’s implementation of EBT either joined or planned to
join a commercial payment network.137 Accepting the free equipment may tie smaller stores,
particularly those in distressed communities, and their customers closer to the financial
mainstream.
The State of EBT 28
A negative aspect of this policy pertains to larger stores like supermarkets already equipped to
handle electronic payment. Since the free POS equipment provided is restricted for EBT
transactions and since the larger retailers wanted to accept other forms of electronic payment to
accommodate their non-food stamp customers, these retailers have opted to upgrade their
existing equipment at their own expense. Even stores with free equipment have purchased
additional machines in order to serve food stamp customers at every counter. Since POS
terminals cost around $450 to $500 per unit, converting to EBT represents a potentially
significant expense for retailers.138 This has led some merchants and industry groups to argue
that states implementing EBT have violated federal regulations and shifted essential EBT costs
to merchants.
Future Capital Costs Associated with EBT
The main capital cost incurred by merchants under EBT, then, has been the expense of upgrading
existing electronic payment systems or investing in new equipment. A potentially significant
future cost involves the purchase of equipment that automatically classifies food items as food
stamp eligible or ineligible. As mentioned earlier, food stamps may be used only to purchase
certain goods, and traditionally it has been the responsibility of cashiers to sort purchases into the
appropriate categories. In a further attempt to reduce food stamp fraud, PRWORA contains a
clause that requires food stamp retailers to deploy, to the extent possible, electronic systems that
differentiate between FSP eligible and ineligible items.139
Complying with this mandate―which would require merchants to integrate their cash registers,
optical scanning equipment, and POS equipment―is technologically feasible for many retailers,
especially supermarkets, but is potentially expensive. One study estimated a national
implementation cost at $4.6 billion,140 and it is unclear who would pay this cost―government,
private industry, or both―and if the strategy is cost justified since there remain ways in which
the technology could be manipulated to allow fraud.
Merchant Costs for Non-Food Stamp Benefits
EBT also may have influenced the costs associated with non-food stamp benefits like TANF.
The USDA’s 1994 evaluation of Maryland’s EBT program argued that providing customers with
access to non-food stamp benefits is a voluntary action on the part of merchants and would only
be undertaken if the benefits exceeded the costs. While merchants incur costs by providing
access to non-food stamp benefits, it is assumed that merchants benefit since recipients will use
part of the benefits to purchase non-FSP goods.141 Furthermore, many states allow merchants to
levy surcharges on non-food stamp benefit transactions, and these fees represent a revenue
stream.
Concluding Observations on System Costs
Even if EBT has increased the capital and operating costs borne by merchants, there are few
available responses. While participation in EBT is voluntary under USDA regulations, merchants
need to adopt EBT or risk being shut out of the lucrative food stamp market. The government
decision to deliver all food stamp benefits electronically essentially has required merchants to
embrace the technology and costs associated with the governmental rules and regulations
implementing the technology―or risk losing sales and customers.
The State of EBT 29
Concern# 2: Government Reimbursements
When merchants who have not requested government-issued POS terminals process EBT
transactions through their private equipment, they must pay a transaction fee to the commercial
network that processes the transaction. Such fees also apply to regular credit or debit card
transactions. In the context of food stamps, these transaction fees represent a new cost to
merchants since they did not incur them under the paper system. These fees vary with transaction
volumes and range from $0.02 to $0.20.142 Many merchants have argued that the government
should reimburse them for these fees for three reasons.
First, as just stated, merchants did not pay the fees prior to EBT and contend they improperly
have to pay costs essential to the FSP, a violation of federal regulations. Second, merchants note
that their decisions to process EBT through private rather than government-purchased equipment
often translates into savings for the state since the state does not have to provide free POS
equipment. Third, USDA regulations specify that “the state agency may, with USDA approval,
share appropriate costs with retailers if the equipment is also utilized for commercial
purposes.”143
In principle, reimbursements are supposed to compensate merchants for the average transaction
fee paid to the commercial processor. Among the states that provide reimbursements, the
payments range from $0.01 to $0.08 per transaction.144 The size of the reimbursement has been
debated in many states, and merchants often demand a higher fee, as happened in Nebraska
where merchants asked for $0.14 per transaction before ultimately receiving $0.05.145
Meanwhile, opponents of the reimbursements charge that reimbursements are a way for
merchants to tap the public coffers. After all, merchants do not complain about paying the fees
on credit or debit card payments made by wealthier customers, so why should customers who
receive government benefits be treated differently?
Concern #3: Technological Reliability
A third merchant concern, which has been an issue since the first EBT pilot in Reading, involves
EBT’s technological reliability.146 As mentioned earlier, system failures impact both benefit
recipients and merchants. Recipients may be unable to purchase goods during system failures,
and merchants may lose sales. Merchants therefore have an interest in ensuring that system
failures seldom occur, but some research has questioned EBT’s technological reliability. One
study conducted by the Food Marketing Institute found that EBT outages occurred an average of
once every three days during the summer of 2000.147 Improving the reliability of EBT has
become a significant concern for merchants, and many trade associations have advocated
specific plans for improving the system.
Currently, merchants, including the Food Marketing Institute, are advocating for the inclusion in
EBT of a “store-and-forward” process similar to the one commercial credit card companies use
when their systems fail.148 Instead of depending on the manual voucher process described earlier,
merchants would like EBT systems to incorporate a limited type of technological IOU that
permits them to make an electronic sale and then settle the transaction after the computer
network has been repaired.149 If it turns out that the benefit recipient has exceeded the amount of
available benefits, merchants also want the ability to collect whatever benefits are available
instead of losing the entire sale, as currently happens.150
The State of EBT 30
Concern #4: Interoperability: A Merchant’s Perspective
Though the 1996 welfare reform legislation required states to develop EBT systems by October
1, 2002, it did not require them to use a particular technology. States were free to develop
systems as they saw fit, resulting in systems that were sometimes incompatible. For example,
most states developed on-line EBT systems, but Ohio and Wyoming implemented off-line
technology. Just as this development would have deprived benefit recipients of the ability to use
their benefits anywhere in the country, it also would have prevented merchants from selling
goods to certain customers. This would have been particularly burdensome for merchants serving
market areas transcending state borders and for larger chains that would have had to purchase
different EBT equipment in each state where they operated.
Advocates for merchants and recipients realized this potential problem quickly and advocated for
government action. One early response was for individual states to achieve interoperability by
deploying EBT equipment on both sides of a border. For instance, Ohio allowed merchants on
the Indiana side of the border to participate in Ohio’s EBT system. Ohio pursued this strategy to
ensure that recipients living near the border would retain access to FSP retailers.151
A second, more complicated response to the issue of interoperability involved states voluntarily
developing and adhering to the QUEST protocol, discussed earlier. While QUEST’s growth
limited the problem of interoperability among the 31 participating states, merchants remained
concerned about the lack of a single national EBT standard. Since participation in QUEST was
voluntary, it remained possible for states to develop different EBT standards, thereby requiring
merchants to invest in different kinds of POS equipment in each market. Merchants and their
trade associations consequently continued to lobby for a single EBT standard that would
guarantee national interoperability.
This goal was achieved in the form of the Electronic Benefit Transfer Interoperability and
Portability Act of 2000. The law requires states to develop interoperable EBT systems by
October 1, 2002, though four states were exempted.152 To further help merchants, the law
prevented states from shifting the compliance costs to authorized food stamp retailers, though
states with existing EBT systems that were not interoperable would have to invest in system
upgrades. To aid these states, Congress agreed to pay 100 percent of the conversion costs,
provided the total amount spent on helping all of the states in a given year does not exceed
$500,000. Moreover, the act also prevented states from placing limits on the geographic areas
where recipients could use their benefits. From the merchants’ perspective, this legislation has
resolved the matter of interoperability.
Concern #5: Cash Flow
In states where benefits in addition to food stamps are delivered through EBT, recipients
typically have the ability to request part of their cash benefits from food store cashiers, though
many states permit merchants to charge for this service. While larger merchants generally have
adequate cash flow to provide cash back, smaller merchants or merchants in areas with high
concentrations of benefit recipients may not have enough cash to meet the demand. These
merchants may respond by refusing to provide cash back, which not only prevents recipients
from accessing their welfare benefits, but also may cause merchants to lose out on sales if
The State of EBT 31
recipients had planned to use the cash to purchase items like toiletries that cannot be brought
with food stamps.
Merchants and Banks
Financial institutions like banks also have benefited from EBT. Under the system of paper food
stamps, banks grudgingly accepted food stamp deposits from merchants. The banks then counted
and stored the food stamps and ultimately sent them to a Federal Reserve Bank for redemption.
Under EBT, merchants handle their food stamp deposits electronically through the automated
clearinghouse system, and banks no longer need to accept grocer coupon deposits. Processing
food stamps electronically has allowed banks to eliminate the costs associated with handling
food stamps without having to stop accepting food stamp deposits.153
Expansion of EBT
By October 1, 2002, EBT systems are supposed to be implemented in all 50 states, the District of
Columbia, and Puerto Rico. These systems will be used to deliver food stamp benefits, and states
will have the option to use EBT to deliver non-food stamp benefits. Moreover, the supporting
electronic infrastructure could be modified and expanded to deliver additional federal and state
welfare benefits. One program suited for a national expansion of EBT is the Special
Supplemental Nutrition Program for Women, Infants, and Children (WIC), though there are
issues involved in such an expansion. The next section will discuss those issues, and the
following sections in turn will discuss expansion of state programs and attempts to increase
EBT’s effectiveness in countering fraud.
National Expansion to WIC
Like food stamps, WIC is a federal program administered by the FNS, but it is a grant, not an
entitlement, program. Eligible low-income pregnant and postpartum women, infants, and
children (up to age five) at nutritional risk receive vouchers that may be used to purchase a
certain basket of approved nutritious foods at authorized retailers.154 During federal fiscal year
1999, $3.9 billion in federal money was used to serve an average of 7.4 million participants per
month.155
Expanding EBT to WIC is a logical step since the program resembles food stamps. WIC and FSP
provide food benefits, and many clients participate in both programs. EBT consequently could be
used to reduce WIC’s operating costs and fraud losses and produce many of the same benefits
associated with electronic food stamps. Using EBT to deliver WIC also could help more eligible
citizens receive benefits. Since WIC is a grant program, it operates on a fixed budget and not all
eligible citizens receive aid. Every dollar saved in administrative costs therefore represents a
dollar that could be used to help people.
As of the summer of 2001, seven WIC initiatives involving 14 states were underway. As with
their electronic food stamp programs, states are procuring WIC EBT services through stand-alone
or joint procurements. Table 5 summarizes the status in each state.
The State of EBT 32
Based on planning
documents and pilot
programs, it is apparent
that electronic WIC
will differ in several
ways from electronic
food stamps.156 The
main difference will be
the use of hybrid
technologies that meld
on-line and off-line EBT. WIC lends itself to an approach that blends the two, and 11 of the 14
states planning or experimenting with WIC are pursuing this option. On-line technology can be
used for the purchase of food at stores, and the off-line component permits the storage of
individualized health and immunization records (which are part of the WIC program) directly on
a person’s benefit card. A disadvantage of delivering WIC through a hybrid technology is that it
requires states to create the appropriate infrastructure. Most have on-line EBT systems in place,
and the use of new technologies would require purchase of new equipment. This would result in
an additional EBT cost, which likely would become a contentious issue between the states and
merchants.
A second difference between food stamps EBT and WIC EBT is that new system vendors have
participated in the various WIC pilots. CSI holds the contract in Michigan, but Stored Value
Systems, a new contender in the EBT market, has become active in several states. Additionally,
some states are trying to avoid hiring prime contractors from the private sector. Wyoming is
serving as its own prime contractor, while Texas and New Mexico are planning to do the same in
their joint procurement.
State Program Expansion
Once a statewide EBT system is constructed, states can choose to deliver other benefits in
addition to food stamps. Public childcare subsidies may be delivered through EBT in a manner
that reduces the administrative costs associated with the paper-based systems, thereby freeing up
funds that could be used to meet the growing demand for subsidized childcare or to increase
reimbursement rates. In the process, childcare providers would be able to receive payments
faster. Oklahoma, for example, is operating a pilot EBT childcare program in Comanche County
that has reduced reimbursement time from six weeks to one week.157 The state, which plans to
expand the initiative statewide during 2002, hopes the system will lower administrative costs,
reduce fraud, and encourage more providers to participate in subsidized childcare programs.
When it is fully implemented, Oklahoma will provide electronic childcare benefits to
approximately 49,000 children enrolled in childcare programs.158
Technologically, an EBT childcare program could operate by installing POS machines at
childcare provider locations. Benefits could be delivered through the same benefit card used for
food stamps. Parents would swipe their card when they dropped their children off and again
when they retrieved them.159 Such automation could reduce the time parents, providers, and state
agencies devote to completing and reviewing attendance, reporting, and tracking forms.
Additionally, states would be better able to monitor whether parents are bringing their children to
Table 5: Status of Electronic WIC Initiatives (USDA)
Region State Procurement
Type
Status
Northeast CT, ME, MA,
NH, RI, VT
Joint Planning stage
Mid-Atlantic NJ Stand-alone Planning stage
Midwest MI, OH Stand-alone Pilots running
Southwest NM, TX Joint Pilot running
West NV, ND, WY Joint Pilot running
The State of EBT 33
childcare and if childcare centers are serving only the number of children authorized by their
licenses, thereby better ensuring that children are receiving adequate care. Of course, privacy
concerns could arise, depending on how this information is used.
Another concern pertains to the price the state pays to the EBT vendor. ACS receives $5.24 per
participating child per month in Oklahoma, the only state currently experimenting with EBT for
subsidized childcare payments.160 That price is significantly higher than the typical CPCM for
food stamps EBT, but it may drop as more children and providers are brought into the program.
Other states have expressed interest in expanding EBT in this way, which demonstrates the
potential that the technology has for delivering all forms of social welfare benefits in an
integrated manner.
Strengthening EBT’s Ability to Deter Fraud
EBT provides states with a potentially effective way of addressing food stamp fraud. Few states,
however, are taking advantage of that potential. GAO has found that only five states with
statewide EBT programs―Florida, Missouri, South Carolina, Texas, and Maryland―use EBT to
detect fraud among benefit recipients, and those five states accounted for 99 percent of the
individual traffickers caught nationwide between federal fiscal years 1998 and 1999.161 States
like Florida and Texas use EBT transaction records to identify stores likely to be engaging in
trafficking and then identify the individuals likely to traffic benefits who frequent the stores.
While identifying stores first and benefit recipients second is similar to the traditional method
used by FNS, EBT allows states like Florida and Texas to develop much more comprehensive
lists of potential traffickers.162 Meanwhile, other states like Missouri use EBT records to analyze
all benefit recipients, not merely those who shop at certain stores. Maryland exemplifies a third
strategy and partners with the FNS to identify potential malefactors. The Office of the Inspector
General (OIG) analyzes Maryland’s EBT records, identifies potential traffickers, and refers those
names to the state for investigation.163
If EBT is to help states reduce fraud within the FSP, FNS needs to encourage states to use it.
This is difficult since FNS has had to struggle with management practices and systems that have
prevented it from responding to fraud. For example, much of the data FNS has is outdated, and
different regional offices follow different procedures for investigating fraud. Communication
between FNS and the states also has been problematic.164 FNS recently has attempted to improve
its performance by encouraging its regional offices to develop consistent policies and to
collaborate with states to deter fraud.165 Also, since investigating fraud carries a high financial
cost for states, FNS in the past has proposed allowing states to keep a percentage of any benefits
recovered from traffickers, though opinion is divided regarding whether those amounts would
cover the expenses involved with investigating fraud.166 Consequently, this incentive has not yet
been implemented.
One way to enhance EBT’s fraud fighting ability would be through the use of biometrics. Using
such technologies as fingerprinting, hand geometry, retina scan, voice verification, and signature
verification could prevent fraud by ensuring that the person accessing benefits at an ATM or
POS machine is the actual person entitled to those benefits.167 GAO has recommended
fingerprinting as the most effective method for countering fraud in EBT programs, and some
states have experimented with that technology.168
The State of EBT 34
As of spring 2002, Arizona, Texas, and Los Angeles County, California, all require benefit
recipients to provide finger images when they apply for benefits. The fingerprints are then cross-referenced
against a database to see if the applicant already is receiving benefits under a different
name. A 1994 pilot program in Los Angeles County that incorporated finger imaging into the
application process for General Relief produced estimated savings of $5.4 million.169 It is
important to note that technologies like finger imaging so far have been used only when people
enroll for benefits, not when they make transactions at POS or ATM terminals.
Texas was the first state in the nation to require finger imaging of food stamp recipients for
program enrollment, in 1996. As of 2001, the state had created a database containing the
fingerprints of 1.2 million clients and had saved $6 million to $11 million in duplicate benefit
issues.170 The state at one point hoped to broaden its program to include POS machines. So,
instead of keying a PIN at a POS terminal to access benefits, a benefit recipient would place one
finger on a special pad that would scan the image, cross-reference it, and authorize
transactions.171 While the expansion never occurred, the debate raised two general objections to
the use of biometrics.
First, critics claimed that biometrics invade the privacy of benefit recipients by creating a
governmental database of personal biological information like fingerprints and retinal images.
Second, any widespread expansion of biometrics would increase EBT’s costs since equipment
like fingerprint readers would need to be installed at ATM and POS machines. Hypercom, a
Phoenix-based firm, recently developed a fingerprint scanner that connects to POS terminals and
costs $120 per unit to install, but installing such devices at every POS terminal in a state would
require a significant expenditure.172
Another problem with biometrics is that some states have begun to doubt its cost effectiveness.
In 2001 Missouri’s state auditor actually recommended removing biometrics from the state’s
EBT program.173 Missouri had been placing photographs of benefit recipients on their EBT
cards, but the state auditor concluded that the photographs were an ineffective way of countering
fraud. Since federal regulations allow family members to use the recipients’ cards, merchants
were ignoring the photographs and allowing anyone with a card and valid PIN to purchase food.
This finding may be generalizable to other states that place photographs on EBT cards.174
Lessons Learned from the EBT Experience
Almost 20 years have passed since the USDA established the first EBT pilot in Reading,
Pennsylvania. Most states have EBT systems in place, and the remainder must develop systems
by October 1, 2002. However, it appears that seven states―California, West Virginia, the Virgin
Islands, Guam, Delaware, Iowa, and Maine―will miss the deadline. Of the states that have
implemented EBT, many have moved beyond the congressional mandate to provide electronic
food stamps and are delivering non-food stamp benefits like TANF as well. Additionally, a
national expansion to WIC appears likely. In spite of this growth, EBT’s development has not
been devoid of problems. When taken together, EBT’s development, growth, and problems teach
three lessons that policymakers should consider when developing technological delivery
mechanisms for social welfare benefits.
The State of EBT 35
First, the EBT experience illustrates the danger of assuming that technological solutions
automatically lower costs. Though EBT gained prominence in the 1990s as a result of the
National Performance Review, the Federal Electronics Benefit Transfer Task Force, and
PRWORA, it was not a new or untested concept. A body of evaluation literature existed as a
result of earlier pilot programs in Pennsylvania (Reading), New Mexico (Albuquerque),
Minnesota (Ramsey County), and Maryland, and these studies indicated that EBT was not
necessarily an improvement over the status quo. In fact, the Maryland study revealed that EBT
increased the administrative costs of non-food stamp programs like TANF and was cost-competitive
with paper food stamps. Evaluations also indicated that benefit recipients and
merchants, though supportive of EBT, incurred costs due to the technology. In spite of the
available evidence, it still was assumed that electronic benefits automatically would be cheaper
than paper. EBT therefore teaches that when evaluating technological tools, decision makers
need to view that technology as a potential improvement to a process rather than as an automatic
improvement.175
Second, EBT demonstrates the unintended consequences that may result when one stakeholder’s
interests are elevated over those of others. The EBT story suggests that the federal government
elevated its interests over those of the states, merchants, and benefit recipients. The government
hoped to save money in the short term. To ensure that outcome, the government used its rule-making
powers to require cost neutrality. When coupled with changes in EBT’s economics, cost
neutrality regulations increased EBT’s costs to the states, which in turn shifted costs to benefit
recipients and merchants. EBT therefore may not have benefited all food stamp stakeholders.
The federal government may have saved money, or at least maintained a certain level of
expenditure, but it redistributed costs among other stakeholders.
Third, EBT illustrates the problems with implementing technology in a decentralized way. While
PRWORA required states to implement EBT for food stamps, the act provided states with the
flexibility to develop systems as they saw fit. Yet, the FSP is a national program that transcends
state lines since benefits are intended to be portable. By implementing EBT in a decentralized
fashion, Congress created a situation where states could have technologically incompatible
systems, resulting in food stamp benefits that would not be portable. As discussed earlier, EBT
interoperability and portability were key concerns for both merchants and benefit recipients.
Though Congress responded by passing the Electronic Benefits Transfer Interoperability and
Portability Act, this issue shows the difficulties that result from implementing a national program
in a decentralized way.
The Short-Term Challenges
EBT is here to stay, and states have invested in the technology to comply with the federal
mandate. As time passes, states may be able to grow EBT into a system that can deliver myriad
social welfare programs in a manner that saves money and provides better services. Before that
happens, however, states and the federal government need to address the economic issues
involved in EBT, including the market’s competitive dynamic.
The State of EBT 36
Addressing this situation is important since EBT contracts in 25 of the 41 statewide programs
expire between 2002 and 2003 (see Table 6). These expirations will raise a number of issues.
Having gained experience with EBT systems, renewing states have a better grasp of the services
they want to provide. However, the market is dominated by CSI, which serves as the prime
contractor in 75 percent of the states with statewide programs and as a subcontractor in others.176
It therefore is unclear whether states will be able to negotiate for the services and costs they
desire or whether they will have to accept CSI’s terms. When coupled with EBT’s fluid
economic condition, states may encounter higher costs.
Based on the experiences of the seven states that already have issued at least their second request
for proposal (RFP) for EBT contracts, price increases appear likely. For example, New Jersey’s
second contract with e-Funds differs from the first by requiring interoperability and limiting the
number of free ATM transactions, but it also raised the CPCM.177 Similarly, when South
Carolina negotiated a second contract with CSI, the new contract specified system
interoperability but doubled the CPCM.178
Coping with EBT’s Competitive Dynamic
A key reason for these price increases has been the change in EBT’s competitive dynamic. The
combination of declining caseloads, government regulations, poor financial forecasting, and the
aggressive pursuit of business by one vendor has turned EBT into a market with diminished
competition. CSI is the industry leader and enjoys the experience and advantages that accompany
that position, but ACS’s recent acquisition of Lockheed Martin IMS and Montana’s recent
decision to award its EBT contract to TRW suggest renewed competition in the EBT market,
though it is too soon to know.179 Unless the competitive dynamic of the EBT market changes, all
states rebidding their EBT contracts may find themselves facing higher prices. States have three
choices for dealing with these higher prices.
First, states simply could accept the higher prices provided by the market, abandoning the goal of
saving money through EBT and striving instead to minimize the amount of additional funds they
have to spend. One way to do this would be by shifting costs to benefit recipients and merchants.
The fees and surcharges that benefit recipients already pay in many states are a manifestation of
that approach. Of course, this results in the ironic situation where a technology intended to
reduce stakeholder costs requires them to spend more—which raises the question, If EBT
requires states to spend more on a technology that requires stakeholders to pay more, what is the
point of switching from paper to plastic?
Second, states could follow the lead of Texas and Wyoming and serve as their own prime
contractors. After Texas’s prime EBT contractor, Transactive, left the EBT market, the Lone Star
Technology Department of Texas’s Department of Human Services became the state’s prime
EBT contractor. The EBT system was then bid in three parts―central processing, retail
Table 6: Pending Contract Expirations
(Center for Community Capitalism)
Expiration Year State
2002 AL, DC, LA, MD, NJ, NM, OH, UT
2003 AR, CO, CT, GA, HI, ID, IL, KS, MA, MO, NH, NY, NC, OK, RI, VT, WA
The State of EBT 37
management, and customer service―that were awarded as subcontracts to three different
vendors.180 Such a strategy may benefit states in several ways. Not only does the state retain
direct control over its EBT system and the ability to develop the system as it sees fit, but this
strategy may foster increased competition among EBT vendors. While few firms have the ability
to serve as prime contractors, many firms have the technological resources needed to provide
system components. The Center for Community Capitalism’s survey of state EBT experiences
illustrates this fact: While only CSI, e-Funds, and ACS/Lockheed have served as prime
contractors, 11 other firms currently serve as subcontractors in various states. A further
advantage of the Texas model is that it can be employed in a coalition system and thereby help
states achieve economies of scale. A disadvantage of this approach, however, is that it requires
states to have the resources and abilities needed to manage the EBT and keep up with the
constant changes in electronic payment technology.181
One state attempting to follow the lead of Texas and Wyoming is Louisiana, which is selecting a
vendor for its next generation of EBT. The Department of Social Services requested proposals
both for a total EBT system and for the three constituent system parts―central processing
services, call center services, and retailer management services. Depending on the bids it
receives, Louisiana may pursue a total system developed by one vendor or select a different
vendor for each system part, as have Texas and Wyoming.182
Third, states could stop using EBT to administer non-food stamp benefits, since various
evaluations have indicated that EBT reduces the costs of food stamps but increases the costs of
delivering non-food stamp benefits. One possibility would be to deliver non-food stamp benefits
through EFT. Not only is EFT extremely cost effective, it also represents a way of connecting
benefit recipients to the banking system. Moreover, EFT would eliminate many of the consumer
issues raised earlier since having a bank account renders the vendor fee and surcharge issue
moot, provides people with Regulation E protections, affords a higher level of privacy than EBT,
and does not involve the issue of interoperability. A drawback to this option is that banks may be
unsupportive of a program that requires many low-balance, high-volume bank accounts.183
Dealing with Cost Neutrality – (SECTION NEEDS TO BE RE-WORKED)
A factor complicating state responses to higher prices is the federal cost neutrality requirement,
a cornerstone of federal EBT policy. That requirement originated in 1993 during the planning
stage of Maryland’s EBT program. To avoid higher costs, the federal Department of Health and
Human Services insisted on cost neutrality provisions, which eventually became part of the
regulations that governed EBT’s national expansion. Yet, while cost neutrality may be beneficial
to the federal government, the policy may hurt the states and curtail EBT’s development in
several ways. The Federal Electronic Benefits Transfer Task Force, an outgrowth of the
National Performance Review, elaborated on the problems that cost neutrality could cause in its
1994 EBT implementation report. The task force recognized that the cost-neutrality standard
would penalize “states that have kept costs down the most―even when the shift to EBT would be
cost-beneficial in the long run.”184 In other words, cost neutrality would mean that states with
inexpensive and efficient paper programs would not receive enough federal funding to manage
the switch to the more expensive EBT program, and such states would expend more state
resources on EBT.
The State of EBT 38
to the realization that cost neutrality would create a financial burden for states, the task force
argued that replacing cost neutrality with “a government-wide, multi-program ‘cost-effectiveness’
standard would recognize the interagency, multi-state, and multi-year aspects of
the EBT effort.”185 The task force’s recommendation was not adopted, and, as a result,
states―particularly states that were operating efficient food stamp programs―were reluctant to
adopt EBT because of the potentially higher costs. Maine, for example, traditionally has operated
one of the most efficient paper food stamp systems in the country, and the move to EBT is
expected to increase its food stamp costs by $550,000 per year.186 Maine consequently has
moved slowly on EBT and will miss the October 1, 2002, implementation deadline.
State responses to the cost-neutrality requirement are limited since it is a federal regulation that
states cannot directly change. However, states should attempt to understand the impact that the
requirement is having on their EBT programs and attempt to persuade federal decision makers to
change the regulations.
Adapting to Changes in Pricing Structures
Even if new competitors enter the market, federal cost-neutrality requirements and shifts in the
EBT market make it likely that states will pay more for EBT when they renew their contracts.
This is because vendors have not liked the returns they have earned on their EBT contracts and
will want to maximize their profits. Vendors may try to shift EBT pricing away from the CPCM
model toward one of four main alternatives: a fee-for-service model, a tiered-pricing model, a
caseload floor model, or some combination of models.187 The possibility of new pricing
structures means that states should be aware of the advantages and disadvantages of each.
Fee-for-Service Model
Under this pricing plan, a state would pay the vendor a fixed fee for every EBT service provided:
a set amount for every call that benefit recipients place to the help line and every POS terminal
provided to merchants. This model essentially shifts risks from the vendor to the state. Since
vendors receive a fee for every service, they are immune to changes in the food stamp caseload,
which may make the EBT market more appealing for vendors, especially if they find the current
environment so risky that they refuse to participate. This theoretically could attract more
competitors to the market. Meanwhile, states will save or lose money depending on the direction
the caseload moves. The volatile nature of the food stamp caseload, at least in recent years,
would render it difficult for states to develop accurate budget projections for EBT services. In
addition, the fee-for-service model may impact the quality of EBT services provided by the
vendor. Since vendors receive a payment for every service provided, they are rewarded, not
penalized, for poor performance. For instance, if ineffective customer service requires a benefit
recipient to call the help desk three times to resolve a problem, the vendor receives three fees.188
Tiered Pricing
Under a tiered system, the CPCM changes with caseload levels. Higher levels translate into a
lower CPCM, while lower levels result in a higher price. The chief advantage of the model is that
it better protects vendors from risk and allows states to realize economies of scale. However,
tiered pricing already has been attempted in EBT contracts with little success. One problem with
tiered pricing is that vendors have been unsure how to divide caseloads accurately into tiers and
assign an appropriate price to each level. A second problem is that it is difficult to develop tiers
The State of EBT 39
within joint procurements since different member states have different caseloads. New York and
Rhode Island, for example, are both members of NCS, but they have vastly different caseloads.
The question is, Should these states pay the same rate or should New York receive a lower rate
than Rhode Island?189
Caseload Floors
This pricing model represents another method of mitigating EBT’s risk to vendors. Under the
model, states guarantee vendors a minimum revenue level, regardless of the actual caseload
levels. While this model is appealing to vendors, there exists little incentive for states to endorse
it since states will not receive any cost savings if caseloads fall.190
Combined Model
This model permits states and vendors to negotiate agreements that contain elements of the
existing CPCM model and the three alternatives mentioned above. For example, the state and
vendor could agree to a contract that combines a CPCM with tiered pricing. The two parties also
could negotiate different pricing elements for each EBT service like customer service or
transaction processing services. Because of the flexible nature of a combined model, its
advantages and disadvantages would need to be evaluated on a case-by-case basis.191
Alabama, which in late 2001 was involved in the bidding process for its next generation of EBT,
is attempting to create a hybrid model combining CPCM, tiered pricing, and a caseload floor.
The CPCM paid by the state will vary depending on which tier the caseload level falls in, but
these tiers have been drawn more narrowly than in the past. Additionally, the state guarantees a
caseload floor. If the caseload falls below the range contained in the lowest tier, the contractor
will receive the CPCM specified in the lowest tier. There also is a caseload ceiling―that is, if the
caseload exceeds the highest tier, the state would pay the CPCM specified in the highest tier.192
Since Alabama currently is negotiating the contract, it is too early to know if this hybrid model
will represent an improvement in the pricing of EBT services.
Choosing between On-Line and Off-Line Technologies
Another challenge for states is deciding whether to adopt off-line technology. From a
technological standpoint, off-line technology offers two advantages over on-line technology.
First, the embedded microchip allows off-line cards to hold considerably more information than
on-line cards. This capacity may expedite transactions, particularly internet-based ones since the
chips can store electronic signatures,193 thereby eliminating the need for customers to wait for
and sign paper receipts generated at the register. Second, off-line cards are harder to counterfeit
than on-line ones, reducing the possibility of fraud.194
Unfortunately, off-line technology carries several disadvantages. Chief among these is cost.
While an on-line card costs $0.25 to manufacture, an off-line card’s price ranges from $3.00 to
$10.00.195 Another significant concern is that the existing commercial payment environment is
not designed for off-line cards. Most POS readers located in retail establishments are designed
for on-line cards and are incapable of accessing the information stored on an off-line card’s
microchip.196 Nevertheless, credit card companies, retailers, and the government have shown a
growing interest in off-line technology. Credit card companies like American Express have
introduced or plan to introduce off-line cards, while Target, a national retail chain, has begun
The State of EBT 40
installing off-line technologies in its stores. Most interestingly, the Department of Defense has
begun issuing off-line cards to 4.3 million uniformed and civilian employees,197 which may
speed the technology’s growth and acceptance.
USDA began experimenting with off-line EBT technology to deliver social benefits in 1990.
That year, the FNS sponsored a pilot program in Dayton, Ohio, that delivered food stamps
electronically. In 1994 this program was expanded throughout the state of Ohio. Meanwhile, a
second pilot occurred beginning in 1993 in Wyoming. That project used EBT to deliver both
food stamp and WIC benefits. Evaluations of the various pilot programs revealed that off-line
technology was a reliable method for delivering benefits, especially for WIC. Off-line
technology lends itself to WIC because the detailed health and immunization records that are part
of the program can be stored directly on the smart cards. However, the evaluations found that
off-line technologies are more expensive to implement and administer than on-line EBT systems.
Costs are expected to fall if more states adopt the technology.198 However, this seems unlikely,
since most states already have developed on-line systems and it seems implausible that they
would switch technologies after having invested so recently in on-line systems―especially since
the on-line platform remains the technological standard in most retail environments.
Conclusion
The EBT story and its lessons enrich the public policy process by demonstrating the strengths
and weaknesses of a technological attempt to reduce the fraud losses and administrative costs of
social welfare programs. These lessons are offered to help policymakers and public
administrators improve the existing EBT program as it transitions into its next generation.
The State of EBT 41
Appendix A: List of Acronyms
ACH Automated Clearinghouse Network
ACS Affiliated Computer Services, Inc.
AFDC Aid to Families with Dependent Children
ARU Audio Response Units
ATM automated teller machine
CPCM cost per case month
CSI Citicorp Services, Inc.
DHHS U.S. Department of Health and Human Services
EBT electronic benefits transfer
EBTSAG EBT Single Administrative Grant
EFT Electronic Funds Transfer
EFTA Electronic Funds Transfer Association (EFTA),
FNS Food and Nutrition Service
FSP Food Stamp Program
GAO General Accounting Office
NCS Northeast Coalition of States
OIG Office of the Inspector General
PIN personal identification number
POS point of sale
PRWORA Personal Responsibility and Work Opportunity Reconciliation Act
SSI Supplemental Security Insurance
TANF Temporary Aid to Needy Families
USDA U. S. Department of Agriculture
WIC Women, Infants, and Children
SAS Southern Alliance of States
WSEA Western States EBT Alliance
The State of EBT 42
1 Office of Analysis and Evaluation, Food and Nutrition Service, U.S. Department of Agriculture, The Evaluation of
the Expanded EBT Demonstration in Maryland, Vol. 1 Abt Associates, 1994, 1.
2 “Electronic Benefit Transfer (EBT) Provisions of Personal Responsibility and Work Opportunity Reconciliation
Act, Proposed Rule,” Federal Register 56 (May 27, 1999): 28763–28768.
3 Joseph Radigan, “EBT Rules Cause a Stir,” US Banker (July 1997): 75.
4 General Accounting Office, Food Stamp Program: Implementation of Electronic Benefit Transfer Systems, GAO-
02-332, 1. 2002. ALSO SEE COMMENTS ON OTHER GAO ENTRIES.
5 David B. Humphrey, “The Economics of Electronic Benefit Payments,” Economic Quarterly 82:2 (1996).
6 David Barstow, “Welfare Debit Cards Offer Benefits and Some Snags,” New York Times, June 18, 1999, New
York City edition.
7 General Accounting Office, 9.
8 Data taken from Center for Community Capitalism, The University of North Carolina at Chapel Hill, Survey of
State EBT Programs (2001).
9 Michael A. Stegman, Savings for the Poor: The Hidden Benefits of Electronic Banking (Washington, D.C.:
Brookings Institute Press, 1999), 7.
10 Stegman, 9.
11 Center for Community Capitalism, 33.
12 Center for Community Capitalism, 44.
13 Center for Community Capitalism, 111.
14 Center for Community Capitalism, 39.
15 U.S. Department of Agriculture, Food Stamp Program Participation and Costs, USDA home page, accessed on
March 25, 2002, .
16 Brian Kibble-Smith, “Citibank Profitably Pioneers Electronic Benefit Transfer Programs,” Journal of Retail
Banking Services 19:4 (1997): 3.
17 General Accounting Office, Welfare Reform: Data Available to Assess TANF’s Progress, GAO-01-298, 1, 6.
DATE? SEE OTHER GAO ENTRIES BELOW
18 Office of Analysis and Evaluation, 19-–20.
19 Office of Analysis and Evaluation, 22–25, 28.
20 Office of Analysis and Evaluation, 19.
21 John Kirlin, Seth Cooper, Sandra Nolden, and Christopher Logan, Evaluation of the Expanded Off-Line EBT
System in Ohio: Moving to a Statewide EBT System Using Smart Cards for Food Stamps (Abt Associates), March
1999, 8.
22 Kirlin et. al, 8.
23 John A. Kirlin, Charles R. King, Elizabeth E. Davis, Christopher Jones, and Gary Silverstein, The Feasibility of a
Nationwide Electronic Benefit Transfer System for the Food Stamp Program (Abt Associates), April 1990, vii–viii.
24 Food and Nutrition Service, U.S. Department of Agriculture, EBT Alternatives Analysis (Phoenix Maximus), 15.
25 Food and Nutrition Service, 24.
26 Food and Nutrition Service, 24–25.
27 Center for Community Capitalism, 35
28 Food and Nutrition Service, 26–27
29 Center for Community Capitalism, 169.
30 Center for Community Capitalism, 28, 34.
31 Food and Nutrition Service, 16–23.
32 Robert E. Robertson, Food Stamp Program: Program Integrity and Participation Challenges,GAO-01-881T
(Washington, D.C.: General Accounting Office), 9. CAN THIS PUBLICATION INFO BE USED IN GAO
CITATIONS ABOVE? ALSO, DATE?
33 Complaint